â€śAnd would you like to open a [insert store] card today to receive an extra 10% off your purchase?â€ť
Weâ€™ve all heard this upsell strategy. Store credit cards seem to be available at just about any place you exchange currency for goods â€” except for maybe 7-11. But before you sign up, itâ€™s important to know how opening a store card can help, or hurt, your finances.
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There are two types of store credit cards: store-only (closed loop) and co-branded (open-loop). The closed loop version limits your ability to use the card except with the retailer and its affiliates. The open-loop version carries a card network logo, such as Visa or Mastercard, which can be used anywhere Visa or Mastercard cards are accepted.
Some retailers offer both closed and open-loop versions of their cards, while others only offer a closed-loop card. Typically, the closed-loop cards are easier to be approved for: they often come with lower credit limits, and can be great for consumers looking to build or rebuild their credit scores.
The open-loop cards can require a higher credit score for approval, and some retailers will allow you to upgrade from a closed-loop card to an open-loop card after youâ€™ve demonstrated good payment behavior with the closed-loop card. Or, they may require card applicants to apply first for the closed-loop card and, upon review of their credit file, approve them for the open-loop version, depending on their creditworthiness.
In addition to an initial discount on your first purchase, store cards can entice shoppers to return with ongoing discounts, special pricing and rewards programs. If youâ€™re a regular shopper at that particular retailer, those discounts can help you save money, provided you pay off the balance in full when the bill is due. On the flip side, you may find yourself overspending on the card, as the temptation to just pull out the card when you donâ€™t have the cash could be hard to resist.
Here are some pros and cons of applying for a store credit card:
Initial and ongoing discounts. If youâ€™re purchasing a large-ticket item, getting a 10% or 20% discount can be a smart decision. And if you regularly shop at a particular retailer, taking advantage of ongoing promotions and sales will also help you save money.
Store perks. In addition to regular discounts and promotions that may come with a store card, some also throw in more perks like free shipping, invitation-only events, coupons and rewards programs.
Building credit. If youâ€™re new to credit, getting a low-limit store card can be a great way to get started, as these cards are typically easier to qualify for. The payment activity of the card will be reported to the credit bureaus. As long as you handle the card responsibly, your good payment history will be reflected on your credit reports.
Rebuilding credit. If youâ€™ve made financial blunders that have negatively impacted your credit score, getting back on track with a store card is an option you can try before having to resort to a secured card, which will require a deposit of several hundred dollars.
High interest rates. The average APR for new store credit offers is 24.97%, compared to 16.91% for credit cards in general. With such high APRs, you donâ€™t want to roll over a balance month to month on these cards or you may fall into a debt spiral, finding it ever more difficult to dig your way out of debt as interest charges pile up. Plus, any interest you pay will effectively negate any discount you got for using the card in the first place.
Low credit limits. While a retailer may increase your credit limit over time with responsible use of a store card, your initial credit line on a new store may just be a couple hundred dollars. If the amount of your purchases regularly comes close to maxing out your credit limit, your credit score will be negatively affected, as credit utilization (your balance compared to your credit limit) accounts for 30% of your credit score.
Increased temptation to spend. Knowing youâ€™ve got access to retailer credit, even though you donâ€™t have the cash to spend, can make it too easy to rack up purchases you otherwise you couldnâ€™t afford. And if you donâ€™t have the funds to pay off the balance at the end of the month, youâ€™ll be socked with sky-high interest charges.
Limited rewards redemption. Store card rewards programs typically require cardholders to use their rewards, cash back or points at that particular retailer or its affiliates only.
Deferred financing traps. If you apply for a 0% deferred financing credit card offer where you are given a fixed period of time to pay off a purchase without incurring interest charges, know that you run the risk of being hit with back interest from the time of purchase if you donâ€™t pay off the balance during the 0% promotion time frame.
Hard inquiry. Anytime you apply for a new credit card, the lender will review your credit file to evaluate your creditworthiness. This is called a hard inquiry and will knock a few points off your credit score. The good news is that the inquiryâ€™s impact will only last a year.
Have a payoff plan. If you apply for and use a store card specifically to take advantage of a discount or promotion, have a plan in place for paying off the balance before interest charges accrue.
Resist overspending. Leave your store card at home unless you have a specific purchase in mind â€” that way you wonâ€™t succumb to impulse spending if you happen to walk in the store and have the card on hand to make unplanned purchases.
Make multiple monthly payments on high balances. To maintain low credit utilization on a low-limit card, it can be smart to make multiple payments online throughout the month. Better yet: once you make a purchase with the card, pay it off the next day online.
Cancel the card if it leads to too much temptation. While canceling a card can hurt your credit score, being buried in debt you canâ€™t easily pay off is worse. If having a store card makes it too easy to spend beyond your means, youâ€™re better off without it.
Store cards are great if youâ€™re looking for a way to build or rebuild your credit score as theyâ€™re generally much easier to qualify for, but they can be dangerous if they tempt you to spend more than you can afford to repay. If youâ€™re not careful, the high APRs and low credit limits that are often associated with store cards can quickly lead to trouble. But if you shop regularly at a retailer, being able to access discounts on a regular basis can help you save money, as long as youâ€™re diligent about paying off the balance in full by the due date.
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