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10 Reasons To Avoid Store Credit Cards

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.

Key Takeaways

  • Reasons to be cautious about store credit cards include overspending for rewards, high interest rates, the risk of deferred interest, late payment fees, accumulating multiple cards, low credit limits that impact credit scores, limited rewards confined to a single retailer, and a lack of long-term value when compared to general-purpose credit cards.
  • Store credit cards may encourage unnecessary spending to take advantage of temporary deals, potentially leading to financial waste. General-purpose credit cards can help you stick to your budget and long-term financial goals.

What Is a Store Credit Card?

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.

  • Closed-loop store credit cards. These cards are limited for use within a specific store or retail chain. They offer rewards and benefits tied directly to the retailer, and you can only use them for purchases at the issuing store.
  • Open-loop store credit cards. Unlike their closed-loop counterparts, open-loop store credit cards are affiliated with a major credit card network like Visa or MasterCard. This means they can be used anywhere credit cards from that network are accepted. These cards often provide rewards and discounts for purchases made within the affiliated store, but they also offer broader spending options.

Why You Might Want a Store Credit Card

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:

  • Discounts and Special Offers. One of the primary reasons people sign up for store credit cards is the promise of immediate discounts or exclusive offers. Retailers often provide substantial discounts when you open an account or make your first purchase with their credit card.
  • Loyalty Rewards. Store credit cards usually come with loyalty programs that reward you for making purchases within the store. These rewards can include cashback, gift certificates, or points that can be redeemed for future purchases.
  • Financing Options. Some store credit cards offer promotional financing, allowing you to make significant purchases with little to no interest for a specified period. This feature can be useful for spreading out the cost of large purchases over time.

What Makes a Store Credit Card Worth It?

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:

  • Frequent Shopper. If you frequently shop at a particular store or retail chain, a store credit card could be worthwhile. The rewards and discounts can add up over time, saving you money on your regular purchases.
  • Large One-Time Purchase. Store credit cards with special financing offers can be advantageous if you're making a significant one-time purchase, like furniture or electronics. These cards allow you to spread out payments over several months without incurring interest.
  • Building Credit. For individuals with limited credit history or a lower credit score, a store credit card might be an accessible option to build or rebuild credit. They often have less stringent approval requirements than general-purpose credit cards.

10 Reasons To Avoid Store Credit Cards

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.

1. You Spend Just to Take Advantage of Rewards

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.

2: You Get Hit with Heavy Interest

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!

Related: What happens if you miss a credit card payment?

3: You Use a Card’s Special Financing Feature

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.

4: You Can’t Make the Full Minimum Payment on 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!

5: Store Card May Multiply, Leading to Too Many Store Cards

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.

6: Stuck with a Low Credit Limit

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.

    A Low Credit Limit on a Store Credit Card Can Hurt Your Credit Score

    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.

    Related: Reasons why your credit score dipped 100 points

    7: Rewards Are Limited

    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.

    8: No Long-Term Value

    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.

    9. Can't Use the Card Elsewhere

    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.

    10. Temporary Deals Increase Unnecessary Spending

    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.

    Are Store Credit Cards Ever a Good Idea 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.

    Store Credit Card Alternatives

    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:

    • Stick to a rewards card. Get a cashback or travel rewards credit card you can use at a wide variety of retailers. This eliminates the need for multiple store-specific cards. Look for cards with the most versatility and value.
    • Use gift cards instead. If a retailer offers discounts for opening a credit card, see if you can get a store gift card instead to redeem savings without getting the card. This allows you to take advantage of promotions while avoiding credit accounts.
    • Pause and think before applying. Next time you're checking out and get prompted to open a store card, pause and reconsider. Think through whether you really need another account. Don't give in to pressure from cashiers to sign up on the spot.
    • Have a spending limit. Before you enter the store or go shopping, you should have a budget in mind for what you can spend. If you are shopping with that limit in mind, you won't be tempted to overspend with a store credit card.

    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.

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