Are you the person who’s always tempted when you get to the cash register and the cashier offers a discount in exchange for a credit card application?
Have you reached the point at which you can barely close your wallet because it’s packed with store credit cards you never use?
Department store credit cards are constantly debated in the financial industry. Some say they’re credit killers, while others say they can be a strategic move.
Fortunately, our experts are here to break down the pros and cons for you. Read on to learn more.
Benefits of Department Store Credit Cards
The next time you’re offered a store credit card, here are some benefits you should consider.
The most obvious allure of a store credit card is the one you’re tempted by at the counter: the discount. Stores often use an upfront discount of 10%-20% when you sign up for their credit card.
As an extra incentive, many retail stores also offer ongoing discounts that are exclusive to cardholders. This is on top of the growing practice of offering rewards like a small percentage of cash back.
If you shop at the store often, the discounts may be worthwhile.
Addition to Your Revolving Credit
One factor that raises your credit score is the percentage of revolving credit you’ve used.
Revolving credit is credit you can use over and over. For instance, credit cards are an example of revolving credit. A mortgage is not revolving credit because when you pay off part of the mortgage, you can’t use that money for other purchases.
Credit bureaus are interested in the percentage of your revolving credit being used at any given time. For example, let’s assume that you have $1,000 of credit card debt. To find out your percentage of revolving credit you’re using, add up the credit limits of all your credit cards.
It’s better to have $1,000 of credit card debt if you have a total credit limit of $10,000 than to have $1,000 of credit card debt with a total credit limit of $3,000. By adding a store credit card, you add to your total credit limit–which can lower your revolving credit percentage.
Additional Credit Available
The other clear advantage to adding a store credit card is that you have additional credit available if you want or need it. For many shoppers, this comes in handy around the holidays.
If you have low credit or little credit, you need to get several types of credit accounts to establish a record of reliable payments. This can be challenging because not many types of credit are available to those with low credit scores.
Department store credit cards, however, are among the easiest credit cards to get. This makes them a great opportunity for you to start building your credit.
Disadvantages of Department Store Credit Cards
Of course, store credit cards are not all roses and unicorns. They have their disadvantages every borrower should consider as well.
Hard Credit Inquiry
One factor in your credit score is how often you apply for credit.
When you apply for new credit (like a store credit card), it’s called a “hard inquiry” on your credit report. If you have more than two hard inquiries on your credit report within twelve months, it can lower your credit score.
Before you apply for a store credit card, think back to the number of hard inquiries you’ve had in the last year.
Retail credit cards are notorious for their high-interest rates. In fact, the average APR (annual percentage rate) now 24.99% for retail credit cards!
If you plan to pay off your balance right away, the APR may not be a large consideration. But if you aren’t sure or if you’re charging your purchase because you can’t afford the full amount yet, these high-interest rates will make your purchases cost far more in the long run.
Lowers Your Average Age of Accounts
Another important factor in your credit score is the average age of your accounts. Lenders want to see that you’ll stay with them long-term, rather than opening and closing accounts impulsively just for the perks.
When you sign up for a store credit card (or any new credit card, for that matter), it lowers the average age of your accounts. Eventually, your average will go back up and so will your credit score–but it can take some time.
It’s also important to realize that some credit cards will close automatically if you don’t use them after a certain amount of time (usually two to five years). If this is one of your older accounts, it hurts your average account age.
To avoid this issue, once you have a credit card, remember to use it every once in a while.
One More Bill to Manage
If you’re only used to making credit card payments a few times per month, adding one more can create a cash flow problem.
When you don’t have a lot of wiggle room in your monthly budget and you’re not able to pay off the balance right away, this is an issue you need to consider.
Tips for Deciding If You Should Get a Department Store Credit Card
Based on all these pros and cons, the decision about whether to get a store credit card isn’t a straightforward choice. Applying for a retail credit card may be a good idea if:
- You don’t expect to take out a mortgage, auto loan, or another loan any time soon.
- You have a low credit score and want to build your credit.
- You can afford to pay off your balance regularly.
On the other hand, it may not be the right time for a store credit card if:
- You have a high credit score and need it to stay high because you plan to take out a mortgage or a loan soon.
- You can’t afford to pay off the balance and will ultimately be stuck with high-interest charges.
Which decision will you make?
Making Your Store Credit Cards Work for You
Like all types of credit, store credit cards can either help or hurt your finances in the long run.
It’s all about understanding the factors of your credit score and making knowledgeable choices for your situation.
For more help on this topic, check out our credit card reviews and other personal finance tips.