Pros & Cons of Store Credit Cards
Nearly 70% of U.S. adults have applied for store cards on impulse at checkout. We all know the scenario in its varying forms. “Would you like to save 20% today by signing up for our store card?” That savings can be significant if you’re making a big purchase. It’s tempting, especially if you shop at the store often. And salespeople will often mention it casually as if there is very little risk involved. But that’s not necessarily true. Here’s why you should always think before you act.
As U.S. News and World Report states, store credit cards are widely available. Some brands partner with banks and others will partner with a major credit card company like Visa or Mastercard to offer them. Purchases on these cards are often limited to the affiliated retailer but make no mistake: Many can affect your credit score (positively or negatively) just the same.
“It's not wise to apply for new credit in the heat of a shopping frenzy, especially if the lure of new credit would encourage you to make a purchase you wouldn't otherwise,” Experian points out, adding that the risks begin when you agree to apply. “Applying for a retail credit card generates a hard inquiry on your credit report, which can have a negative effect on your credit score. If you only apply for one store credit card, this hit will be temporary. However, applying for multiple credit cards all at once can cause a more significant dip in your credit score.”
Store cards are often easier to acquire than traditional credit cards. If you’re financially responsible and need to build your credit history, that could be a benefit. By keeping purchases to about 30% below the spending limit, purchasing only what you can afford (despite the cashback promotions and member deals), and paying the balance in full every month, it can be possible to use a store card to build a positive credit history.
But it’s not easy. Store cards often have higher interest rates (up to 24.99% on average) and lower credit limits than traditional credit cards. Once you start missing payments, it’s very hard to get back on track. As you inch closer to the credit limit, the card will do more harm than good for your financial health.
If you haven’t done so already, make “No, thank you!” your default response at the checkout counter. If you have teens or young adult children, be sure they understand the ramifications of agreeing to the offers, too. One survey found that Millennials and younger (Gen Z) were most likely to feel pressured to apply for a store card while making a purchase. Even if they never use the card (only the discount for signing up), their credit score could be affected by multiple hard inquiries.
Then, carefully weigh your options on a select few. It’s possible a store credit card could offer great benefits including discounts, cashback, and a low-barrier credit line, but only if you can stay on top of payments and maintain a healthy cushion within the balance (remember, a maxed-out card can negatively affect your credit score, too).
A credit card from your credit union is often a better option. The interest rate is usually less than half the interest rate on a store card (8.9% versus 24.99%, for instance). The line of credit you receive can be thousands of dollars more, too (allowing for that important cushion in your credit line). And if it’s a little seasonal bump in cash you’re seeking, don’t forget that CPS IBEW FCU members have access to fast cash loans and skip-a-payment options that can save you from signing up for a store card you may regret in the long run.
