Store Credit Cards: What to Know Before Signing Up

It seems that every cashier these days is offering up a store credit card. While your knee-jerk reaction may be to say, “No, thank you,” there may be times you should say, “Yes!” Opening a retail store credit card could give you access to discounts, rewards and special offers that you otherwise wouldn’t get. And if your credit score needs a boost, using a store card responsibly could do just that. Next time you’re asked if you would like to apply, think about these five questions before you say no.

Store cards may lure you in with a 0 percent introductory APR, but watch out for deferred or retroactive interest.

1. HOW WILL YOU BENEFIT?

   Store credit cards reward loyal customers. Some offer a discount off your first purchase, while others have a 0 percent introductory annual percentage rate (APR), which means you will not pay interest on your purchases for a set period of time. They may have a built-in rewards program, in which you can earn store credit for future purchases, or give you access to exclusive discounts and events. Some offer cardholders free shipping, gift wrapping or alterations.

   A point of caution: Remember that the store’s ultimate goal is to keep you coming back, so be careful that your spending doesn’t outweigh the rewards. Additionally, you may find general-purpose cards that offer similar or better benefits, and if you’re able to use them in more places, you may earn more rewards faster. Compare store cards to those that earn you airline miles, hotel points and even cash back to decide which one makes the most sense for you.

2. WHAT ARE THE INTEREST RATES — AFTER THE INTRODUCTORY PERIOD?

   Once you’re beyond the introductory period, most store credit cards have a significantly higher APR than general-purpose credit cards, at 25 to 30 percent. According to the Federal Reserve, the average APR on all credit cards in June 2016 was 11.5 percent. If you carry a balance on a store card, you could be paying twice as much interest than if you had the same balance on a general-purpose credit card!

   Store cards may lure you in with a 0 percent introductory APR, but watch out for deferred or retroactive interest, which means that if you don’t pay off the balance before the end of the introductory period, you would be charged the new interest rate on either the current balance or on all the charges you’ve made since opening the card.

   To avoid that, divide your balance by the number of months the rate applies, and pay at least that much every month so that it’s paid off before the new interest rate kicks in. By breaking it up into small chunks, you won’t be stuck with a large bill at the end of the period — or worse, a hefty interest charge.

3. DO THE BENEFITS OUTWEIGH THE COSTS?

   Some store cards charge an annual fee, so you’ll want to earn enough discounts and rewards to recoup that cost. For example, if you typically order online and pay for shipping at least once a month, a card that charges a $50 annual fee but offers free shipping may save you money in the end.

   When it comes to large purchases, like appliances or furniture, a store card with a 0 percent introductory APR can help you break up that cost over time. Some cards also offer special interest rates to existing cardholders, so if you buy a refrigerator today and then need a new washer and dryer in a year or two, you may be able to use the benefit again. Watch the store’s ads and your credit card statement so you can take advantage when you need it.

4. HOW WILL IT AFFECT YOUR CREDIT RATING?

   Store credit cards may be closed-loop, meaning you can use them only at that store, or open-loop, meaning they have the store’s branding but are major credit cards that can be used anywhere. People looking to build or repair their credit may have an easier time getting approved for a closed-loop card.

   On the plus side, when used wisely, a store card can help you improve your credit rating. Paying your balance on time every month will show a positive payment history, which makes up 35 percent of your credit score. Paying the balance in full will also increase your overall available credit without increasing your usage. Credit bureaus look at the percentage of available credit that you use, so keeping this number low could also boost your score. They also consider the types of credit you have, so having a mix of revolving credit (including store and general-purpose credit cards) and loans can position you more favorably.

   But beware of how store cards can negatively affect your score. They usually have a low limit, which could put you at risk for a high utilization percentage. For example, if you have a balance of $200 on a card with a $300 limit, that looks worse to credit bureaus than if you have a $200 balance out of a $1,000 limit. And if you open several new accounts, including credit cards and loans, within a short period of time, that could also raise a red flag.

5. CAN YOU USE IT RESPONSIBLY?

   Although it’s last on this list, this is the most important question to ask yourself. With their high interest rates and low limits, store credit cards can be detrimental to your credit score and wallet if you carry debt. Before you apply, be honest about whether or not you can avoid the temptation to overspend, no matter how great the perks of the card.

   Before you make your first purchase, find out when you can expect your first bill and how you can pay it off. You may be able to do so in the store rather than mailing in a check or making an electronic payment, which can save you a late fee and interest if you find yourself cutting it close to your bill’s due date. Take note of your card’s billing cycle and any applicable introductory periods to make the most of the perks without being penalized.