The lure of applying for a credit card at the cash register to snag a discount can seem like a good idea. Especially during a busy holiday season, store credit cards might provide more options when it comes to stocking up on gifts, decorations, or other festive purchases.
Applying for and obtaining a credit card from your favorite stores can be a good way to get benefits or rewards such as discounts, points, cash back or free shipping.
But store credit cards also come with certain drawbacks that you should know about.
Store credit cards come in two basic types:
Store cards and credit cards are very similar at first glance. Each one can be used to make purchases to be paid off at a later date. Store cards can be easier to apply for and get approved for while providing exclusive discounts and promotions at participating retailers. However, most store credit cards can only be used at those retailers and often charge higher interest rates.
General-purpose cards tend to have the broadest rewards programs. Depending on the card, you might be able to redeem for cash back, travel, gift cards, merchandise or something else.
If you have a store credit card, your rewards will probably focus on perks offered by that individual retailer. These tend to focus on cash back, either as statement credits or as funds you can apply to offset future purchases.
Generally, store credit cards are easier to get approved for than many credit cards and often have the convenience of application and approval during a transaction. Many stores offer additional discounts, promotions, and special financing once you are approved. Stores usually have a rewards or loyalty program system that can be used in that store. If used responsibly, store credit cards can be a tool for building credit as they tend to be easy to qualify for and can be a good starting point if you’re looking to establish a credit history from scratch or to rebuild your credit score. Generally a store credit card does not have an annual fee.
Even though there are advantages to store credit cards, there are some reasons why a store credit card debt is worse for consumers than a credit card. Most store credit cards can only be used at specific retailers. Store credit cards tend to have lower credit limits which may result in higher utilization and on average the interest rates are higher on store credit cards than bank cards. Store cards charge an average APR of 25.77 percent, according to CreditCards.com’s 2021 poll, so the cost of carrying a balance will quickly outpace your rewards potential.
Store credit cards carry potentially misleading terms. Many “0 interest” store offers are actually deferred interest promotions, meaning that if you have any remaining balance at the end of the promotional period, you’ll be charged retroactive interest on your average daily balance all the way back to the beginning.
Retailers often make it easier to apply for a store card compared to getting a credit card. Cashiers often encourage shoppers to apply for a store card at checkout with a promotion on their purchase. And in many cases, you can apply by providing your identification to the cashier and the application decision is instantaneous. Store cards are generally easier to get approved for than a traditional credit card because they typically don’t require credit scores as high as most major credit cards.
Consumers should fully understand credit terms (interest rates, special financing, fees, etc.) before they enter into any credit card agreement. Consumers should be cautious about those impulsive offers encouraging them to “save 15 percent off that day’s purchase if they open a store credit card.” If the purchase amount is not soon paid off, the cost of carrying a balance on that store credit card will soon overtake any short-term savings. Store credit cards often have low credit limits. A sizable purchase could result in high credit utilization, which could affect the consumer’s credit score.
Additionally, differences may exist in the amount of protection a consumer has when contesting charges. With a store credit card you may still be able to contest charges and get them reversed, but that coverage may not be as robust or comprehensive as with a bank credit card.
When it comes to store credit cards you may want to consider these tips to make sure your money is protected:
Store credit cards typically have more relaxed qualification requirements; however, credit card issuers do not specify the average score necessary to obtain a retail credit card. You don’t need perfect credit to get approved for a retail credit card, which can make applying even more tempting. Some store cards will approve applicants with scores as low as 550, which is considered poor. There is no defined range for a fair credit score, but typically a FICO score between 580 and 669 are considered fair.
Other factors in addition to credit score can be considered when reviewing applications. Your employment status, ability to pay, willingness to pay and credit score are all factors used to determine approval. The economy also plays a role in your ability to qualify for a retail credit card. Creditors tend to tighten lending standards in a sluggish economy. When the economy is booming, standards are often more relaxed.
The impact of store credit card debt on your credit score and credit history is very similar to bank credit cards. Items like credit utilization and payment timeliness play a critical role in the way credit bureaus calculate your credit score. How much of your credit limit you use has a major influence on your credit scores. Before applying for a store credit card consumers should consider the following cons of store credit cards:
Be it a store credit card or general-purpose credit card, responsible use of credit still applies. Paying off a store credit card debt requires consumers to pay bills on time, try to pay off the balance when possible or pay above the minimum payment, and keep credit utilization below 30%.
Credit cards are for convenience, not as a way to supplement income. At GreenPath, we work with people daily to use credit responsibly. Contact a trusted non-profit financial counseling agency like GreenPath (833-753-1024, www.Greenpath.org) for a free initial financial assessment. Certified counselors can review your income, expenses and budget, review credit card terms and help you manage debt as well as cover your household essentials.