Store credit cards: What are the pros and cons?

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Store credit cards: What are the pros and cons?

Stand at the register with your credit card in hand, and you’ll have been asked at some point by a cashier if you’d like to apply for a store credit card and use it instead to pay for your first purchase. You’ll get an immediate discount or some other kind of introductory perk, they’ll tell you, with other future promotional benefits in store as a card holder.

This can be quite an attractive offer if you’re loyal to a certain brand or retailer, but is a store credit card the right choice for you? There’s often no time to read the terms and conditions of the card when you’re pressed to make a decision standing in line, and that can mean overlooking details that could cost you money.

To help you make your decision, here are some pros and cons of store credit cards to weigh before signing up for one.

Store credit card pros

They’re great for your credit

People with low credit scores or minimal credit history may find it easier to get approved for a store credit card than that of a conventional card from a bank, since their requirements are often less strict. Retailers may often prioritize getting more customers to use their store-branded card over declining people based on their credit score.

Since store credit cards can be more accessible to consumers without much credit to their name, they’re great tools to build and maintain your credit if you don’t qualify for a regular credit card. In this case, they’re not all that different from secured credit cards designed to help create, establish and boost your credit.

Many store credit cards also come with lower credit limits to keep spending in check. Do this, plus pay your monthly bill in full, on time, and the purchases you make can be a great credit aid.

Discounts and promos are abundant

Store credit cards need to differentiate themselves from regular credit cards and give potential card holders a good reason to sign up for them, so retailers will back them with frequent discounts, promotions and other perks as an incentive to attract new customers.

The first discount card holders often see is at signup, where you may get a percentage off your purchase that day. You’ll also have a chance to take advantage of regular discounts, where you might get an extra percentage off already discounted items when you use your card.

Store credit card holders may also have access to everything from receiving coupons to getting discounts for special in-store, by-invitation shopping events and seasonal sales. Some store cards may let you return or exchange items without a receipt, or offer cash back or rewards points.

Financing options

Retailers, particularly those that sell large appliances or electronics, may offer special financing options for store credit card holders making big ticket purchases. Customers in many cases have the incentive to pay off their balance interest-free during a special promotional period, usually anywhere between six to 24 months. (However, if you don’t pay off your full balance by the end of that period, interest will begin to accrue.)

Sometimes, card holders may also be able to take advantage of additional discounts and promotional benefits if they choose to finance what they buy.

Store credit card cons

Less versatility than regular credit cards

One of the drawbacks to store credit cards is that you may only be able to use the card at a specific store; if you shop at a certain department store only once in awhile, your card might end up sitting in your wallet more than being swiped. The card can’t be used at other points of sale, either, like the supermarket.

Like we mentioned above, store credit cards can come with smaller credit limits, which can be advantageous for curbing excessive spending. But it can also pose its own dangers to your credit: Store credit cards carry lower limits to promote more spending, but with a lower limit, card holders may be tempted to max out their card, which can raise your debt-to-credit ratio, the amount of debt relative to the amount of available credit you have -- a guaranteed way to lower your credit score, since it implies that you rely too much on credit.

By keeping your credit utilization rate low -- not exceeding 20 to 30% of your available credit limit -- you reduce the risk of running into debt and keeping your debt-to-credit ratio balanced.

Higher interest rates

Store credit card interest rates tend to be higher than those of regular credit cards:

  • Average store card rates: 23.84%

  • Average conventional credit card rates: 15.18%

This can pose a problem if you’re the type to carry a balance on your credit card statement from month to month. High penalty APRs can tack on more to your balance, and can compound higher and higher the longer you wait to pay off what you owe.

This may not seem like a big deal if you don’t have an outstanding balance for more than a month or two, but let interest accrue for too long, and it can cancel out any savings you may have initially had from discounts or sales. Always double check the card’s APR before signing up.

Applying can mess with your credit

Overspending or failing to pay off your card isn’t the only way a store credit card can hurt your credit score and profile. Though they can be great credit builders, store credit cards can temporarily knock your FICO numbers down a few digits when you apply for one, since it triggers a hard inquiry to your credit history (when a creditor requests a copy of your credit report from the three nationally-recognized credit bureaus).

Applying for multiple cards at once can do even more damage, albeit temporarily. A "hard" inquiry of your credit report -- an official look into your credit history by a lender or creditor -- can lower your credit score by a few points because it can indicate a credit risk. The more credit card applications to submit, the more your credit score can drop, since it may imply an overdependence on credit.

Opening several cards simultaneously also skews your credit utilization ratio, posing a potential impact to your ability to get approved for other credit cards or lines of credit. Adding too many new cards into the mix can also lower the average age of your credit accounts (new credit versus old credit), and may also pose a negative impact to your score.

However, if you’re in the position of juggling several new cards at once, as long as you keep your credit usage low, new cards with available credit can serve to benefit your overall credit utilization ratio over time, balancing out the amount of credit you use with the amount available to you.

Like any other financial product, a store credit card can have its advantages and disadvantages -- it can help or harm your credit, and it can complement or hinder your credit usage. Most store credit card applications are made within seconds or minutes of checking out at the store, giving you little time to really consider if it’s the right move for your finances, so weigh the pros and cons, and always read the fine print to see if the terms, conditions and interest rates are right for you.

By spending wisely, paying off your balance on time, and limiting the number of credit cards you apply for, using a store credit card at your favorite store is one of the best ways to maintain a revolving line of credit and keep your credit score climbing.

Image: Roderick Eime