Store Credit Cards: The Perks and Pitfalls


The prospect of price breaks on merchandise draws many shoppers to use, and even open, store credit cards. Discounts typically take the form of:


*Percentages off items or total purchases;

*Specific amounts off of minimum purchases;

*Rewards, offering deeper discounts, savings or free items.


Depending on the retailer, shoppers can save up to 50 percent on purchases simply agreeing to open an account.


However, the decision to take on store credit involves more than landing bargains. Consumers must consider whether a store credit card will actually save them money and whether it will lead to an improved credit score. Financial conditions may determine whether a store credit cards, or any credit at all, is wise. For consumers with designs of becoming homeowners or buying a vehicle, the credit scores loom as a major factor in qualifying for the necessary loans.


With these thoughts in mind, below are some benefits and pitfalls of store credit cards.


Teaser Deals


Some retailers, especially sellers of consumer electronics, furniture and appliances, entice shoppers with zero-interest financing on purchases. Generally, card holders must pay off the balance within a specified time, such as one year or 18 months. Those expecting to have sufficient funds, such as through a tax return or other lump sum payment, can save perhaps hundreds of dollars in interest. If the balance is not paid off, interest accrues from the date of purchase, not the date the zero-interest period ends.


High Interest


Interest rates on store credit cards tend to run higher than other credit cards. For example, CreditKarma reports, in November 2015, retail credit cards carried an average interest rate of 23 percent, while credit cards overall averaged 15 percent interest. Unless the balances are paid promptly, the accumulating interest can erode and exceed the savings from the discounts or sale prices.


A Low Credit Ceiling


Compared to cards from major issuers, store credit cards have smaller limits. While this caps purchasing power, it can make store cards a tool for improving credit scores. Low credit lines translate to more manageable balances and monthly payments. With solid prospects of on-time payments and paying off the balance, card holders can build a good credit history. Fair Isaac Credit Corporation (FICO) bases 35 percent of its credit score on payment history.


New credit users, especially from the first-time employed and student ranks, may find store credit cards a realistic start to building credit. Typically, store credit cards have less stringent standards for acceptance than cards with higher credit limits. Further, under the CARD Act, those under age 21 cannot open a credit card without parental approval and the ability to handle it.


The low limits could negatively impact credit scores by creating high credit utilization rates. This rate represents the ratio of outstanding balances to the credit limit. With a credit limit of $500 on a store credit card, it takes only purchases of $250 to have a 50 percent utilization rate. Generally, the ratio should be no higher than 30 percent. Higher rates tell credit scorers and potential lenders that a borrower depends significantly on debt. The prospect of high utilization rates could deter the use of retail cards, unless a customer has other high-limit and low balance accounts.


Younger Looking Credit History


The inducements that drive a customer to new store accounts could pull down to an extent credit scores. FICO counts credit history factors such as the average age of accounts for 15 percent of a credit score. More new accounts can counter the benefit of older accounts appearing on a credit report. Further, opening several store credit cards could result in credit score deductions. The amount of new accounts constitutes 10 percent of the credit score.


Lack of Flexibility


Unless the store co-brands with a major issuer, the account holder can use the card only with the store. Cards that are not co-branded do not afford holders access to cash advances or credit to pay bills or for purchases not connected to the retailer. These restrictions can prove effective for consumers seeking to restrain their accumulation of debt.


Track and Organize Credit Use


With a store-only credit card, consumers can know from what store particular items were purchased. This affords more convenience should the shopper need an exchange or refund, as the shopper does not need to comb several entries in a statement to find the purchase.


Additionally, by using store credit cards, holders of multiple credit accounts can free larger-limit cards for major purchases such as appliances and major vehicle parts or repairs, or even vacations.