A store-specific credit card may seem like a great idea when you’re looking for a deal at checkout time, but these cards aren’t always the best option when it comes to your finances. While it’s tempting to take advantage of the signup offers (get 15 percent off just for applying!), the reality is that you need to dig deeper before you agree to a retailer’s credit card.
When applying for a retail credit card, watch out for these three issues:
1. High interest rates. Retail credit cards usually charge much higher interest rates than their more general counterparts. While it’s possible to find a traditional credit card with an interest rate of between 9.99 percent and 19.99 percent, depending on your creditworthiness, it’s not uncommon to find that retail credit cards have rates of between 20 percent and 30 percent.
With those high interest rates, whatever benefit you received from signing up could be completely offset at the end of the first month’s billing cycle. Habitually carrying a balance on a retail credit card can be a quick way to rack up debt.
In order to avoid this trap, make it a point to pay off your credit card before interest is charged. If you know you can’t pay off the credit card at the end of the next statement period, you may want to avoid getting the card in the first place—no matter how good the sales pitch.
2. Low limits. Many retail credit cards have low spending limits, which can put a dent in your credit score if you’re not careful. Credit utilization—the amount you owe compared to the amount of credit available to you—accounts for approximately 30 percent of your Equifax credit score. The higher the balances on your card, the higher your credit utilization rate, and the riskier you can look to lenders.
In addition to your retail cards, you may want to maintain other types of accounts, including major credit cards—especially those that you’ve had a long time—as well as mortgages and auto loan accounts.
3. Limited or non-existent rewards. Beyond the initial discount or introductory APR for a limited period of time on certain items, many retail credit cards don’t offer rewards. There are some store credit cards that allow you to earn points or that offer you special discounts throughout the year, but you almost always have to use these rewards in the specific store.
Because you can’t use many of these store cards at other establishments, rewards are even more limited, and sometimes loyalty wins out over comparison-shopping for the best prices. So not only are the rewards lackluster, you also end up with the possibility of spending more money just to get those rewards.
Instead of signing up for a store credit card for the initial discount, pay attention to where you do a lot of your shopping. If you find that you spend a great deal of time in a single store without the encouragement of having a store-specific card, it might make sense to apply.
However, the reality is that you might still be better off getting a good rewards credit card from a major issuer. You’ll earn rewards no matter where you shop, you won’t have to worry about super-high interest rates, and many rewards, such as cash back, are universal.
Keep in mind that the length of your credit history also matters, accounting for 5 percent to 7 percent of your score. If you open a new retail card at every store you enter in order to get a discount, you could shorten the length of your credit history and negatively impact your score—even if you do pay your balances on time.
Miranda Marquit is a freelance writer and professional blogger specializing in personal finance, family finance and business topics. She writes for several online and offline publications. Miranda is the author of Confessions of a Professional Blogger: How I Make Money as an Online Writer and the writer behind PlantingMoneySeeds.com.