Everything You Need to Know About Retail Store Credit Cards
When you shop at a certain store frequently, you might think opening a credit card account there makes solid financial sense. After all, many retail establishments tout incentives as a perk to their loyal credit card holders — such as, for example, Nordstrom’s offer of a $20 gift certificate once shoppers spend $1,000. Other cards dangle discounts to attract bargain-hunting shoppers — perhaps only credit card holders get access to special sales and promotions, or they might receive cash back for certain purchases. But is a retail store credit card really a benefit to your credit — or does it simply encourage you to spend money that you don’t necessarily have?
They can be a good credit-building tool — but proceed cautiously.
If you are trying to establish a good credit record, retail credit cards are a relatively safe way to do so. Most retail credit cards have a low barrier to entry — meaning that even if your credit score is less than stellar, it is fairly easy to be approved for one. Using a store credit card judiciously — that is, keeping your spending habits in check and paying at least the minimum amount due every month — can serve as an excellent exercise in building your credit properly. But be careful. If you open up an account at every store, that will end up looking like too much open credit on your credit report. Also, having a store credit card can tempt you to spend money that you don’t have, or go hunting for items that you don’t really need.
You can easily hurt your credit.
Most credit cards offered in-store boast a low credit limit. How much trouble can you really get into with a credit limit that low? Well, you might be surprised. Low limits mean there’s little wiggle room if you happen to overspend one month. Also, if you continually carry a high balance from month to month — and you are close to hitting your max — it will start to negatively affect your credit score, as you will appear to be maxing out your credit limit. And each time you open a new retail store account, it registers as a hard inquiry on your credit report, also known as the store’s check into your creditworthiness, which can lower your credit score.
The interest rates tend to be higher.
Retail establishments certainly tout the benefits you’ll enjoy as a cardholder, but you’re less likely to hear about the interest rate or APR — that is, unless you dig into the fine print. A 2016 report from CreditCards.com found that store credit cards charge an average of 23.84% interest, up from the average credit card interest rate of 15.22%. That means you actually end up spending more money than you’re saving when you don’t pay the full amount due every month.
Some retailers also waive interest for a certain period of time — such as six months or a year — if you promise to pay off the balance in full in that time period. That can be a good benefit if you want to finance a big-ticket item. But again, it can be a risky move if you are unable to pay the full amount within the promotional period. Many retailers will then begin charging you all of the interest that would have accrued from the date of purchase.
Weigh the risks versus rewards.
It helps to weigh the risks versus rewards when you’re deciding whether to open a store credit card. Do you already have a solid track record of paying your debts every month? Then a retail credit card might be a good idea for you, as long as the store is offering you considerable incentives to become a cardholder. However, store credit cards don’t necessarily provide better benefits and loyalty packages than, say, a major credit card that can be used at all establishments. So, you might be better off sticking with one credit card that offers cash-back rewards across a range of different retail stores, rather than just one.
Do your research.
The bottom line: Make sure you do your research before signing up for just any retailer’s offer. Read into the interest rates and compare the incentives and rewards to those offered by other establishments or major credit cards. And be honest with yourself about how responsible you’ll be with a store credit card, so you don’t end up digging a deeper financial hole.
Retail credit cards are just one way you can improve your credit and build a pathway to a smarter financial future. At Ovation Credit, we aim to guide clients through the process of rebuilding credit and becoming a more responsible credit card user. Contact us today for a free consultation to review your credit reports and answer any questions you may have.