Store credit cards, also known as retail credit cards, are ubiquitous in the world of consumer finance. They're often offered by your favorite retailers, enticing you with promises of discounts, special offers, and rewards. These cards can seem appealing, especially when you're making a big purchase at your favorite store.
However, it's crucial to tread carefully. In this comprehensive guide, we'll delve into the world of store credit cards and explore why you might want one, what makes them worth considering, and the telltale signs of a bad store credit card. We'll also uncover the various risks associated with store credit cards and provide eight compelling reasons to think twice before signing up for one.
Store credit cards are a type of credit card issued by retailers, department stores, or even gas stations. They're typically designed to encourage customer loyalty and increase spending within a specific store or retail brand. These cards come with various features that can include discounts on purchases, exclusive offers, and rewards programs. Store credit cards can be categorized into two main types: closed-loop and open-loop.
Before we delve into the reasons to avoid store credit cards, let's explore why someone might consider getting one in the first place. Store credit cards have some benefits that can be appealing under certain circumstances:
Store credit cards can be worth considering if they align with your shopping habits and financial goals. Here are some scenarios where a store credit card might make sense:
Now that we've explored why someone might want a store credit card let's look at the signs that indicate a store credit card might not be a wise financial choice.
The allure of earning 5% cash back or big discounts on future purchases can lead even the most frugal shopper to buy more than they normally would. You may find yourself tossing a few extra items in your cart to hit the purchase threshold for a reward or discount, even if you don't really need them. "It's okay, I'm earning money back!" you tell yourself. But in reality, overspending to earn rewards just means you're spending more in total.
The deferred interest deals may seem enticing when you need to finance a major purchase. But miss just one payment after the promotional period ends, and you'll find yourself slapped with up to 25% APR or more. And since store cards have lower limits, that high interest rate applies to a larger portion of your balance. Suddenly you're forking over hundreds in interest charges and negating any upfront discount or savings. Make sure you can pay it off in time!
Similar to deferred interest deals, many store cards offer attractive no interest financing for 6, 12, or 18 months. It lets you spread out payments on a large purchase over time. But again, if you carry any leftover balance past the promotional period, watch out! The deferred interest comes crashing down all at once, with interest calculated from the original purchase date. This retroactive interest can mean paying 2-3 times more than the original cost of the item if you don't pay off the full balance in time.
Even if it's $25 or $50 a month, missing the minimum payment spells trouble. You'll usually get hit with a $35 late fee immediately, not to mention owe penalty interest rates. Multiple late payments means a plunging credit score, making it harder to get approved for loans or cards when you really need them. Set up autopay from your bank account to prevent missed payments!
Opening retail cards here and there seems harmless in the moment. But before you know it, you've racked up 10 store credit cards! Juggling all those accounts, minimum spends, payment dates, and temptation to overspend with each one can quickly snowball into a financial mess. Try to limit store cards to one or two retailers you frequent often.
Large retailers may offer $500+ limits to start, but small boutique store cards often cap limits at $300 or less. This gives you very little wiggle room. Plus, the closer you get to the card's ceiling, the more it hurts your credit utilization ratio--a key factor in your score. Aim for 30% or less utilization on all cards.
You’d think that having a lower credit card limit would help your credit score. However, that’s not always the case. The credit reporting bureaus look at how you use your available credit. Racking up balances that are at or near your credit limits lowers your score.
Now, store credit cards are known for giving account holders lower credit limits. So, buying that washer and dryer for $1,600 against a $2,000 credit limit doesn’t look good. You’re using 80% of your credit limit, and credit reporting bureaus see that as a risk.
Higher balances in proportion to your available credit limits look like you’re maxing yourself out. In creditors’ eyes, you’re overextending yourself financially and may not have the means to repay lenders. However, the opposite scenario can boost your score over time. Keeping your revolving and outstanding balances at a lower percentage of your credit limits is seen as less risky. It sends the message that you know how to use credit responsibly and pay down your balances.
With most store cards, you're limited to earning rewards at that one retailer. If your spending is concentrated in one area, it can work. But for general, everyday purchases, a card tied to just one store cuts out the vast majority of places you likely shop at. Compare this to a general cash back or travel rewards card valid almost anywhere.
Store credit cards are typically focused on short-term benefits and immediate savings. They may lack long-term value when compared to general-purpose credit cards with more versatile rewards and benefits. If you're looking for a credit card to serve you well over time, a store credit card may not be the best choice.
A big disadvantage is that you can’t use store credit cards outside that specific retailer or chain. It might be nice to use it for everyday or exclusive discounts. However, how often do you shop at that store?
Letting a credit card sit in your wallet doesn’t improve your credit score. If you let it sit long enough, the bank guaranteeing the card might close your account. Then, you’ll have to apply all over again.
Gas cards are infamous for this. You get a gas credit card but can only use it at stations that carry that label or brand of gas. But let’s say you move to another part of the country where that brand and its stations don’t exist.
You’ve essentially got a dead piece of plastic in your wallet. Why not stick to a major credit card that’s accepted no matter where you go? You won’t have to close an account, apply for a different card, and see your credit score suffer from a closed account and a new inquiry.
Have you ever seen a deal on chips at your local grocery store? As a result, you grab the maximum number of bags you can. You feel like you’re getting a great deal and saving money.
However, when you get home and put those chips in the cupboard you realize you’ll never eat them all in time. Some will expire, and others will lose their appeal. You’ll soon get sick of greasy potato chips with every lunch and dinner.
The same thing can happen with store cards. You have it to take advantage of 50% off appliances during the spring and random exclusive online savings. Now you’re buying stuff just because it’s on sale and not necessarily because you need it.
Some of this spending may not be on big-ticket items, but it’s still waste that adds up. When you stick to regular Visas and Mastercards, you’re not as tempted by exclusive or store-specific deals. And you can stick to your budget and financial goals in the long run.
If you frequently shop at a store or online retailer, store cards can improve your long-term credit score and history. You could score some decent perks if you make your payments on time and manage your balances wisely.
Maintaining a home improvement store card might not be such a bad idea if you're a homeowner. You can get a discount on every purchase and take advantage of special financing deals for major purchases. The catch is you need to be certain you can pay off the balance in time.
Those who shop online frequently at major retailers might also benefit from store cards. You can score cashback or discounts on every purchase. Again, the key is to use store cards wisely. Don’t charge more than you can handle; pay off the balances to get maximum savings.
Obviously, store credit cards can seem tempting with their offers of discounts and rewards, but it's often best to resist signing up for them. Here are some tips to avoid acquiring store credit cards you don't need:
By saying no to store cards you don’t truly need and sticking to a small handful of versatile credit accounts, you’ll avoid unnecessary debt, clutter, and complications down the road.