If you have been out shopping recently, you may have been approached at checkout to apply for one of their own department store credit cards. And, if you were lucky, they offered you a discount on your purchase – just for applying.
Have you heard this spiel before?
Department store credit cards can be enticing and rewarding. They can also be dangerous.
To make sure you know what you are getting into next time you are offered that discount upon checkout, we’ve ironed out the truth about these credit cards for you.
The good news about department store credit cards
Department stores often provide you with a lower amount of credit. Depending on the store and the circumstances, most generally offer a line of credit between $300 and $1,500.00. In addition, the guidelines and restrictions to receive the department store credit are often a lot less stringent than the criteria of major credit card companies. This means that if you are trying to build your credit from scratch, this may be a desirable choice. Lastly, the rewards that you may receive by using the card may save you money.
The bad news about department store credit cards
As with most things good, there is usually always a negative. This is true for department store credit cards. It is important to get the details of the credit card before you apply. First, you will find that with these credit offerings, the APR (annual percentage rate) is often high. In fact, interest may be as high as 24.99% – 26.99%, or higher. The interest you have to pay to use that card may be more than the offered discounted savings for cardholders. This is especially true if you carry a balance.
Are you a fan of the department store you are applying for credit at? This is an important question to ask. Because the card will only be able to be used there, you will want to make sure you even like the store. Otherwise, you may find yourself getting whisked away by sales and other discount offerings for cardholders – just because you can. And, that is no way to treat your credit.
Lastly, if you are trying to build up a positive credit history, you will want to be aware that these department store credit cards can actually have a negative impact on your credit. The credit bureaus (and those seeking to give you credit) often look at your credit utilization percentage. Here is an example:
You have a credit card for a local department store with a $600.00 credit limit. On a recent visit to the store, you caught a big sale and figured since you have the card, you would take advantage of it. You spent approximately $250.00. This means you have utilized 42% of your available credit.
Most lenders and banks look at this percentage and typically prefer it to be below 30%. You have barely touched your available credit limit, but because the available amount is so low, it is easy to have a high credit utilization percentage.
With department store credit cards, you will get:
- Small credit approval amounts.
- Easy qualifying criteria.
- A way to potentially start a credit history.
- Incredibly high APR interest rates are very common.
- The ability to only use the card at the particular department store.
- Potential for a high credit utilization percentage/ratio.
- Enticing sales because of the discounts for cardholders.
Department store credit cards can give you an easy way into the credit market, but may not offer you very many benefits after that. If you’d consider yourself an avid shopper, impulse buyer, or a sucker for a good sale, this may not be your best route to credit.
Bonsai Finance works with many lenders who offer credit to those just starting out. Rather than department store credit, these lenders may offer you a better credit limit and APR. In addition, you will not be limited to one store. Seek out your options before opting for a department store credit card.