Should you Sign Up for Store Credit Cards?

By: Eliana Sagarin

You’re at the register, and the friendly cashier asks, “Would you like to sign up for our exclusive credit card?” You brush off the offer and continue with your day. But is it possible you’re missing out on something great?

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How do Store Credit Cards Work?

Store credit cards are a smart way for businesses to encourage spending at their stores.

But they’re not all created the same: Some store credit cards can only be used in the specific store and affiliated retailers that issue them, these cards are called closed-loop cards. Open-loop credit cards on the other hand can be used anywhere within the card’s network, like Discover or Visa.

Store credit cards entice customers with discounts, like 20 percent off your first purchase or 10 percent off every purchase. Loyalty programs reward frequent customers with cash-back, free products and exclusive deals. Sounds pretty sweet, right?

Well, there’s a catch.

Store credit cards come with an APR of about 24.99 percent-- a full 10 percent higher than the standard credit card. If you’re dazzled by the potential rewards of a store credit card, be sure to check if the rewards are really worth the high interest rates.

Who Benefits from Store Credit Cards?

If you have bad or low credit, a store credit card is a solid unsecured option to nurture your credit score.

Store credit cards have low limits and high interest rates, putting them in a similar class to sub-prime credit cards. Because of these conditions, the approval process tends to be much less rigorous than that of a standard credit card.

If you monitor your spending with your store credit card and pay off the full amount each month before interest is applied, you can work towards your credit goals safely and effectively while enjoying the perks and benefits of the store card of your choice.

Why you Should Skip Store Credit Cards

Like any credit card, applying for a store credit card requires a hard credit inquiry, which could lower your credit score by a couple of points. This might not sound like much, but if you’re applying for several store credit cards at once, this could cause unnecessary damage to your credit score.

Let’s discuss credit utilization for a second. The more open lines of credit you have, and the lower your balances on said lines of credit, the lower your overall credit utilization—which is good news for your credit score. Just because you have available credit, doesn’t mean you should use it, no matter what plastic you’re using.

Spending 30 percent or more of your available credit usually raises a red flag to lenders and can have a negative impact on your credit score. If your store credit card has a credit limit as low as $500, a single $150 purchase gets you to the 30 percent mark. See how things can get out of hand? While opening lines of credit is generally good for your finances, proceed with caution so you don’t dig yourself into further debt.