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“Would you like to save an extra 15 percent now?”
It’s a commonly asked question at retailers. Your sales clerk touted the perks and benefits of doing so and has practiced their pitch to convert a shopper, you, into a shop credit card holder.
But just because you are offered a tempting reduction to enroll on the spot by a store doesn’t mean you should.
Consider what owning a shop card signifies beyond that price break. If your goal simply is to build credit, a secured credit card may be another option.
Pros and cons of store credit cardsEstablishes a charge historyHelps construct creditSpecial interest ratesLow charge limitsAnother spending temptationPros1. Establishes a credit history
Store credit cards fall into two categories that are different. Private-label retail cards, which are issued on a “closed loop,” meaning they can be used only in the merchant that sponsors it. They are generally simple for individuals with bad credit scores to obtain although these types of cards deficiency ubiquity.
Why? They’ve been rejected for a card, because retailers want to avoid having to tell a shopper.
In other words, the underwriting standards are usually more lax than those of credit cards that are traditional.
That means private-label retail cards can be “a good point of entry for somebody trying to establish credit,” says Christopher Viale, board chairman of the Association of Independent Consumer Credit Counseling Agencies.
Another kind are co-branded store credit cards, which are sponsored by the merchant but backed by one of the big networks: Visa, Mastercard, American Express or Discover.
These cards may be used at nearly any merchant, just. Underwriting standards on co-branded cards will be the same as credit card products, so consumers with credit files that are thin won’t qualify.
2. Helps build credit
Rebuild or folks seeking to establish a credit history may find a friend in store cards. Retail store card issuers are more likely to approve individuals with lower credit scores, making this a terrific way to build your credit so long as you don’t carry a balance.
Store cards, however, are harder to qualify for since the issuers typically cost for risk — meaning that people with higher credit ratings will get lower interest rates.
The long-term consequence of using a store card can add points. Using these cards and maintaining statement balances low can lower your debt-to-credit limit .
3. Special perks
Both types of store cards must feature a discount plus rewards at that particular merchant. A co-branded store card might even include some type of base earnings rate — approximately one point per dollar — on beyond the store that is sponsoring.
Some shop card rewards programs may feature other benefits, such as bonus coupons, free gift wrapping, free shipping, free adjustments or financing offers.
Whether these benefits are worthwhile will depend at least partially on how often you shop at a retailer. You might have to do a little number-crunching. Also examine reward credit cards to see if you can find a better deal.
“In certain situations, you can find a materially better combination of discount and reward (with the card) than you’d get without the card,” says Brad Wilson, founder of deals site BradsDeals.com, but “even if you get a better deal, there is the hassle and cost of opening and maintaining an account that is not going to get a lot of use beyond the one particular purpose.”
Cons1. Expensive debt
Coming out with a store credit card can be tricky because the percentage rates on these products tend to run high.
In actuality, a recent survey from CreditCards.com discovered that the typical APR on the charge cards from America’s biggest retailers was 23.84 percent, which is significantly higher than the present national average for variable-rate credit cards (Rates hover around 16.7 percent.)
Additionally, while the specifics vary, a store card’s rewards program is “always about getting the customer back in the shop to spend more money,” says Madeline K. Aufseeser, CEO and co-founder of Tender Armor, makers of credit card fraud prevention software.
Undisciplined shoppers could rack up a bill they can not afford to pay off in the end of the month, which would negate the value of discounts or any rewards they’ve earned on the purchases.
“If there is even a remote possibly that you’d carry a balance, you should pass,” Wilson says.
2. Credit score problems
Another drawback to store cards: The charge limits on these products often run low.
“If you’ve got a $300 credit limit and you put $200 on (the card), your credit utilization is going to be high,” says Beverly Harzog, author of “Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made.”
Experts recommend keeping your credit utilization rate — basically how much debt you are carrying versus how much credit has been extended to you — below 20 percent. The lower.
And utilization isn’t the only element that to consider. Each card program will generate a inquiry.
So, yes, “if you start up a bunch of different retail store cards or any sort of credit cards in a brief period of time, that would hurt your score,” says Anthony Harrison, founder and principal of Sprauve-Harrison Communications and a former FICO senior consumer credit specialist.
Should you apply?
As with the majority of credit card concerns, it depends.
If you typically carry a balance, you should shop around for a low-interest credit card instead. If you have a credit rating that can handle a new query and shop a lot, the card could prove worthwhile.
However, if you do choose to take your retailer up make certain to read the terms and conditions. Check to see, for example, what the APR will be once any deferred-interest promotions lapse and if the card carries an annual fee.
You also need to ask at the register how you can pay your bill, because in order to be eligible for the discount, the purchases of that day will typically be charged to the new card.
You may miss your initial card payment, incurring late fees, interest and other penalty charges. The missed payment could also cost your credit rating 70 to 90 points, based upon your current credit rating.