Beware the Cons of Store Credit Cards Before You Sign Up
The offer seems enticing. A store offers you a huge discount if you sign up for a credit card. It promises a full year of interest-free purchases, along with cardholder-exclusive perks like coupons and receipt-free returns. But you’ve also heard negative things about store credit cards. So, are store credit cards good or bad?
Retailer-specific cards do come with a few benefits, but they also have some pitfalls. According to Phillip Parker, founder of CardPaymentOptions.com, stores have an incentive to talk you into signing up.
“Stores push their credit cards because it helps them make more money,” he explains. “When you use a store card, the store earns extra from interest and fees, as well as reduces its credit card processing costs (known as interchange). Store credit cards also encourage people to shop more often and spend more in the store.”
Before you agree to a store credit card, consider these pros and cons.
3 Pros of Store Credit Cards
Chances are, you’re considering a credit card at a store where you frequently shop. That can bring some benefits, including the following.
1. VIP Discounts
Stores will promise the moon and stars to get you to sign up. This often starts with a generous discount on your purchase that day, which motivates you to take action. You’ll see other perks like:
- Exclusive coupons and discounts
- Reward points for purchases
- Enhanced return windows
- Free shipping
- Early access to in-store sales
“Store credit cards with no-interest financing options and other rewards can be helpful if you shop at the store often and can pay off your balance before interest charges kick in,” Parker said. “But because of the high interest rates and lower limits, they aren’t always the best option. They can also tempt consumers to spend more than they intended, which is great for the store but could be detrimental for people who have trouble managing their personal finances.”
2. Credit-Building Opportunities
Having a tough time getting a credit card? A store credit card could be the key. You can even find store credit cards for bad credit. If you can qualify, you’ll be able to make small, consistent purchases and pay off the balance each month. Over time, this may improve your credit score.
“Store credit cards can be a stepping stone for building credit, especially if you’re having trouble qualifying for other cards,” said Owen Blank, a financial advisor at SafeWater Investment Management. “However, in return for this, they can usually come with higher interest rates and lower availability.”
3. Interest-Free Promotional Periods
Ads for store credit cards are typically designed to convert, with headlines like “12 months no interest.” But as Blank points out, these offers often come with a catch.
“Each card is different, but typically, if the balance isn’t paid off within the promotional period, retroactive interest can be charged on the entire purchase,” he explains. “Shoppers should always keep this in mind and be confident they can pay off the balance before the promotional period ends.”
3 Cons of Store Credit Cards
When it comes to answering, “Are store credit cards good or bad?” remember the cons often outweigh the pros. Being aware of them will help you scrutinize the fine print before you add another card to your wallet.
1. High Interest Rates
Ideally, you’ll pay off your credit card balances each month and skip interest altogether. But with credit card debt hitting an all-time high, it’s clear that many consumers carry a balance. Even the best store credit cards typically come with higher interest rates than general-purpose cards, Blank cautions, and that extra interest can add up.
“These rates can easily reach 25% or higher, which means carrying a balance even for a few months can result in substantial interest charges,” Blank said. “Shoppers should be cautious and only use store credit cards if they’re confident they can pay off the balance in full each month.”
2. Lower Credit Limits
Lower credit limits can get in the way of a shopping spree. This can be a good thing for keeping your debt to a minimum, but it can also impact something called your credit utilization ratio. As Blank points out, this can make store credit cards more problematic than non-retailer cards.
“Personal credit scores take into account the percentage usage of one’s credit cards,” Blank said. “Therefore, carrying a higher balance on a lower-limit card can have a more negative effect.”
3. Potential to Overspend
Having a store credit card can encourage spending even when it isn’t within your budget. This is especially true when a retailer is sending you coupons and inviting you to exclusive sales. In that sense, a store credit card can be more detrimental than one that isn’t locked down to one or two stores.
“As with any credit card, if you make purchases within your means and pay your bill in full and on time, then it can be a good way to build credit, but there are many better options,” said Matthew Goldman, author of CardsFTW, an industry newsletter, and founder of Totavi, LLC, a boutique consulting firm.
Instead of a store credit card, it might be a better idea to look for non-retailer credit cards that can help you meet your goals. Chances are, you’ll get a better interest rate and credit limit, plus you can earn rewards that you can use toward shopping at your favorite stores.
If you’re asking yourself, “Are store credit cards good or bad?” it’s important to know their pitfalls. You might be able to find a retailer card with reasonable terms. Even so, it still wouldn’t be the best way to build credit and stick to a budget. If you do opt to sign up for one, make sure you read the fine print and know exactly what you’re getting.
Stephanie Faris is a professional finance writer with more than a decade of experience. Her work has been featured on a variety of top finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling and Sifter.
