Store credit cards - Are they a good deal?
"Would you like to save an extra 15 percent by applying for a store credit card?"
Better get used to hearing that question. With the holiday shopping season just around the corner, retailers will be readying their best pitches -- and promotional discounts -- in an attempt to convert some-time shoppers into full-time store credit card holders.
But should you take them up on the offer? Consider these pro and cons before filling out a store card application.
Pros and cons of store credit cards
- Establishes a credit history.
- Special perks, including: bonus coupons, free gift wrapping, free shipping, free alterations, exclusive financing offers.
- High interest rates.
- Low credit limits.
- Another spending temptation.
Establishes a credit history. Store credit cards generally fall into two different categories. Private-label retail cards are "issued on a closed loop," says Michael Misasi, a senior analyst with payments research and consulting firm Mercator Advisory Group, meaning they "can only be used at the retailer that sponsors it."
While these cards lack ubiquity, they are generally easy for people with low credit scores to obtain.
"If you are a loyal shopper at a store, (retailers) don't want to have the experience of telling you that you've been rejected for a card," Misasi says. In other words, the underwriting standards associated with these products are more lax than those tied to a more traditional credit card.
As such, 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.
Co-branded store credit cards, on the other hand, are sponsored by the retailer but backed by one of the major networks: Visa, MasterCard, American Express or Discover.
The network's backing ensures the card "can be used at pretty much any retailer," says Misasi, just like a traditional credit card product. Unfortunately, underwriting standards on co-branded cards also mirror traditional credit card products, so that point of entry for consumers with thin credit files won't apply.
Helps build credit history. Folks looking to establish or rebuild a credit history may find a friend in store cards. Retail store card issuers "are historically known for being more lenient when it comes to the credit profile of the consumer that they'll approve for a card," says Curtis Arnold, founder of CardRatings.com and author of "How You Can Profit from Credit Cards." In other words, they are more likely to approve people with lower credit scores.
"Retail cards can be great way to help build your credit, assuming you don't carry a balance or much of a balance," Arnold says. He contends they're much cheaper to use than "fee harvester cards" meant for subprime borrowers. The latter zap people with numerous fees that retail cards don't charge.
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 handling a store card well 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.
Special perks. Both types of store cards, however, should feature the aforementioned discount for opening the account as well as 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, Misasi says.
Some store card rewards programs may feature other special benefits, such as bonus coupons, free gift wrapping, free shipping, free alterations or exclusive financing offers.