“Would you like to save an extra 15 percent today?”
It’s a commonly asked question at retailers. Your sales clerk has likely practiced their pitch to convert you, a some-time shopper, into a full-time store credit card holder and touted the perks and benefits of doing so.
But just because a store offers you a tempting discount to sign up on the spot doesn’t mean you should.
Consider what owning a store card means beyond that initial price break. If your goal simply is to build credit, a secured credit card may be another option.
Pros and cons of store credit cards
1. Establishes a credit history
Store credit cards generally fall into two different categories. Private-label retail cards, which are issued on a “closed loop,” meaning they can be used only at the retailer that sponsors it. Although these types of cards lack ubiquity, they are generally easy for people with low credit scores to obtain. Why? Because retailers want to avoid telling a loyal shopper they’ve been rejected for a card.
In other words, the underwriting standards associated with store cards are usually more lax than those of traditional credit cards.
That means private-label retail cards can be “a good point of entry for someone trying to establish credit,” says Christopher Viale, board chairman of the Association of Independent Consumer Credit Counseling Agencies.
The other kind are co-branded store credit cards, which are sponsored by the retailer but backed by one of the major networks: Visa, Mastercard, American Express or Discover.
These cards can be used at nearly any retailer, just like a traditional credit card product. Unfortunately, underwriting standards on co-branded cards are the same as traditional credit card products, so consumers with thin credit files won’t qualify.
2. Helps build credit
Folks looking to establish or rebuild a credit history may find a friend in store cards. Retail store card issuers are more likely to approve people with lower credit scores, making this a great way to build your credit – just as long as you don’t carry a balance.
Co-branded store cards, however, are harder to qualify for because the issuers typically price for risk — meaning that people with higher credit scores will get lower interest rates.
The long-term effect of using a store card wisely can add points to your credit score. Using these cards sparingly and keeping statement balances low can reduce your debt-to-credit limit ratio, which makes up 30 percent of your credit score.
3. Special perks
Both types of store cards should feature a one-time sign-up discount plus accelerated rewards at that particular merchant. A co-branded store card may even include some type of base earnings rate — around one point per dollar — on spending outside of the sponsoring store.
Some store card rewards programs may also feature other special benefits, such as bonus coupons, free gift wrapping, free shipping, free alterations or exclusive financing offers.
Whether these benefits are worthwhile will depend at least partially on how often you shop at a particular retailer. You might also have to do a little number-crunching. Also examine reward credit cards to see if you can get a better deal.
“In certain situations, you can get 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 special purpose.”
1. Expensive debt
Coming out ahead with a store credit card can be tricky, largely because the annual percentage rates on these products tend to run high.
In fact, a recent survey from CreditCards.com found that the average APR on the credit cards from America’s largest retailers was 24.99 percent, which is significantly higher than the current national average for variable-rate credit cards. (Rates hover around 16.7 percent.)
Plus, while the specifics vary, a store card’s rewards program is “always about getting the customer back into the store to spend more money,” says Madeline K. Aufseeser, CEO and co-founder of Tender Armor, makers of credit card fraud prevention software.
So, undisciplined shoppers could easily rack up a bill they can’t afford to pay off at the end of the month, which would negate the value of any rewards or discounts 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 potential drawback to store cards: The credit limits on these products tend to run low, a penchant that could wind up hurting your credit score.
“If you have 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 generally recommend keeping your credit utilization rate — essentially how much debt you are carrying versus how much credit has been extended to you — below 20 percent to 30 percent. The lower, the better.
And utilization isn’t the only factor that to consider. Each card application will also generate a hard inquiry on your credit report.
So, yes, “if you open up a bunch of different retail store cards or any sort of credit cards in a short amount 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 most credit card considerations, it all depends.
If you tend to carry a balance, you should shop around for a low-interest credit card instead. If you shop a lot at one particular retailer, aren’t prone to carrying a balance and have a credit score that can handle a new inquiry, the card could prove worthwhile.
However, if you do decide to take your favorite retailer up on an offer, make sure to carefully read the terms and conditions. Check to see, for instance, if the card carries an annual fee and what the go-to APR will be once any deferred-interest promotions lapse.
You should also ask at the register how you can pay your bill, because in order to qualify for the promotional discount, that day’s purchases will typically be charged to the new card.
You could easily miss your first card payment, incurring late fees, interest and other potential penalty charges. The missed payment could also cost your credit score 70 to 90 points, depending on your current credit score.