When you’re making a purchase at any major retailer or department store, the sales clerk will likely try to persuade you into opening a store credit card before you complete your transaction. While retail sales clerks may promise you a 15 percent discount on your total purchase if you do open an account, these retail store credit cards often do more harm than good, especially to your credit score.
Retail store credit cards may provide you with temporary savings, but they’re generally not worth the hassle of opening an account. Not only are the interest rates much higher than your standard MasterCard or Visa credit card, but the spending limit for retail credit cards is often very low, in comparison. To learn more about why you should avoid opening a store credit card, review the sections below.
1. Low Credit Limits
Depending on your credit score, your store credit limit will typically start out between $100 and $500. With a credit limit this low, you could easily reach this amount after making one or two small purchases. However, reaching your limit is never advisable, as doing so increases your credit utilization, and lowers your credit score. In most cases, spending more than 30 percent of your credit limit will lower your credit score, making it difficult to open new accounts or apply for a loan. With a retail credit limit of just $100, for instance, this would mean that you couldn’t charge more than $30 in purchases at that store.
2. Increase in Credit Utilization
Credit utilization measures the amount of credit you have used in comparison to your credit limit. The higher the utilization, the lower your credit score will be. Whenever you apply for a new credit card (including retail credit cards), however, you increase your credit utilization
and lower your credit score by several points. As you begin to reach the retail store’s credit limit, your credit score will continue to drop.
Since credit limits are much lower with retail store credit cards, it doesn’t take long for you to reach your maximum spending limit. To keep your credit utilization low, however, it is important to repay your balances as quickly as possible, and do your best to keep your credit card balances below 30 percent of your limit. If your credit limit is $1,000, for instance, you should keep your balance below $300 to avoid high credit utilization.
3. You Will Spend More Money
Retail credit cards encourage spending by offering you discounts and rewards for making purchases with your store card, rather than paying with cash or a debit card. However, you may need to spend a minimum amount of money to receive the discount, so you’ll end up paying more than you intended to – all to receive a 15 percent discount on your purchase. Plus, cardholders often receive more promotional emails and mailings directly from the retailer, so you may feel pressured to make purchases more regularly, especially if you tend to overspend.
4. Higher Interest Rates
With a store credit card, you’ll end up spending more on your purchases in the long run, as annual percentage rates (APRs) for store credit cards are typically much higher than those for national credit cards, like Visa or MasterCard. In 2017, for instance, the average APR for retail cards was 24.99 percent. However, APRs for retail credit cards may be as high as 30 percent, in some cases. In many situations, you may spend more in interest than you would save with your cardmember discount.
In comparison, however, the current national average for variable-rate credit cards is around 17.31 percent, making major credit cards a much more affordable option – especially if you plan to maintain a balance above zero dollars.
5. Less Benefits Than Major Credit Cards
While opening a major credit card can help you to build your credit and maintain a positive credit history, retail credit cards do not have the same positive effect on your credit score. Therefore, opening a retail credit card is generally not worth the hassle or the amount you may end up paying in interest. Plus, most major credit cards can be used to make purchases nearly anywhere, while retail credit cards can only be used to shop at one specific retailer or a family of stores. Instead of opening a store credit card to save money on your purchases, take advantage of holiday sales, coupons and money-saving smartphone apps such as GasBuddy, Flipp, Ebates, SnipSnap, CardStar, Coupon Sherpa and Yowza.
6. You Will Feel Rushed to Make a Decision
When you agree to opening a retail credit card, you may feel pressured to complete the application and finalize your purchase without understanding the terms and conditions, or taking the time to read the fine print. Even if you intend to read the fine print when you get home, you may fail to do so, and you may never fully understand what you’re agreeing to. Instead of agreeing to opening a store credit card, simply decline the offer, and use a coupon, instead.
7.The Bank Might Sell Your Personal Information
If a retailer closes and you have an active credit card through that store, the bank could sell or transfer your account (and personal information) to another retailer. In this case, you could end up with a credit card for a store at which you don’t plan to shop. Additionally, you’ll need to repay your current balance as quickly as possible to avoid paying any penalty fees that could harm your credit score. If a store goes out of business, you’ll still need to repay any outstanding debts that you owe.
8. You May Owe Deferred Interest
If you open a retail credit card with the hope of receiving interest-free financing, you’ll likely find that you need to repay your balance within a certain amount of time to avoid paying interest on the purchase. While you generally need to repay your balance within six or 12 months, these terms will vary depending on the promotion. If you do repay the entire balance before the end of the promotional period, you won’t need to pay interest on your purchase. If you don’t repay the full balance before the end of the promotional period, however, you’ll need to pay interest on the original purchase price of the item.
