As you pay for that new shirt or pair of jeans, the cashier offers you an instant discount – if you sign up for a store credit card.
Instant discount – what’s not to like? The card will also probably give you e-mailed coupon codes and invites to members-only sales. You could also rack up rewards points with each purchase, or maybe get free stuff.
Another big plus for store-branded cards: They’re generally easier to get if you’re just starting out, or trying to get back into the credit card game after financial mistakes. So if you can get one of these cards and use it strategically, you’ll be on the way to building or rebuilding your credit.
“Having good credit isn’t about how many credit cards you have and how big a credit limit you have. It’s about using it responsibly,” says Rod Griffin, director of consumer education for Experian, a credit reporting company.
Even if you’ve already got good credit, some store card perks are mighty attractive. If you’re a do-it-yourself person, for example, a home-improvement center’s card might have a great rewards program for all that lumber and paint, plus special financing for big-ticket purchases like appliances.
Store credit card issues
Store credit cards tend to have lower credit limits and higher interest rates. As of late 2019, the average store credit card had a 27.52% annual percentage rate, according to CreditCards.com, compared to an average 17.30% APR for all other accounts.
In addition, most store credit cards are “closed loop” cards, which means you can use them only at that store. In other words, your options will be limited.
That’s why Beverly Harzog suggests trying for a secured credit card first. You could use it for everyday purchases – groceries, gasoline, pet products – instead of manufacturing reasons to shop with a store credit card.
“If you cannot qualify for one of the better secured credit cards, I would recommend getting a retail card. You’ve got to start somewhere,” says Harzog, credit card expert for U.S. News & World Report and author of five personal finance books.
Read our guide to the best personal finance books for every age.
Some other potential problems with store credit cards:
It’s easy to think, “If I do all my birthday/holiday shopping at this store, I’ll be building my credit!” But at least some of those gifts might be more affordable somewhere else. And if you spend more than you can pay off, those high interest rates will hurt.
Suppose the store has great leather jackets and you’ve always wanted one. And with your card, you’ll get an extra 5% off. But is a leather jacket purchase really in your personal budget right now?
Ideally, you’d never spend more than 10% of your credit limit at any given time, and never more than 30%. Some of these cards have initial limits as low as $300 – and it’s really easy to go over 10% in a single shopping trip. The potential impact is huge, since this “credit utilization ratio” has the second-biggest impact on your credit score.
Using a store credit card
That’s not to say you shouldn’t be shopping. On the contrary, just owning the card doesn’t improve your credit. It’s the moderate use of that card, followed by prompt repayment, that builds your credit history and score.
So spend accordingly. If you want to use more than 10% at a time, Harzog suggests making at least two credit card payments per month.
“You want that low ratio,” she says.
Always, always pay in full and on time. Carrying a balance does not improve your credit score, but on-time payments make up a whopping 35% of your FICO score. Automate a minimum monthly payment, just in case.
And if you do forget, and only the minimum payment goes through? Make another payment right away, to zero out the balance. Why pay more interest than you have to?
How many store cards do you need?
Suppose you get a store card and you’re handling it well: spending strategically, then paying it off every month. Should you apply for more cards?
Probably not. For starters, when you apply for a card there’s a “hard pull,” which means the creditor asks the three major credit bureaus for your credit report. The inquiry knocks your credit score down by a few points.
Multiply that by four or five applications and the impact is noticeable. It also makes you look a little too eager. Lenders might be concerned about someone who had zero credit (or poor credit) suddenly wanting lots of cards.
Speaking of which: When trying to rebuild credit, make sure you’ve addressed the reason you got into trouble in the first place. If your previous credit goofs involved poor money-handling skills or a shopping addiction, consider getting help from a nonprofit credit counseling agency recommended by the National Foundation for Credit Counseling.
A store credit card is a tool, not a toy. Use it wisely to build your credit score, which will have a major impact on your financial future.
“Don’t get excited that they gave you a card. Get excited about having the chance to open the door to other financial services and opportunities,” Griffin says.
Here are more pros and cons of store credit cards.