When it comes to credit cards, most people think about a regular Visa or MasterCard or a rewards card that’s tied to an airline or a hotel chain. These are definitely popular options in the credit card game.
However, they are by no means the only options. Many retail stores like Macy’s and Kohl’s offer credit cards. The Walmart credit card is a little different because it’s basically a cash-back credit card. An approved application for most store credit cards will usually come with a discount of 10% or more on your first purchase, but there are some negative aspects of these cards that might make you want to think twice before you apply.
Your Credit Will be Hit
Every application for a new credit line will affect your credit score. This includes everything from a house to a store credit card with a $500 credit limit. Recent credit applications will show up on your credit report and cause a minor hit to your scores in the short term.
If you’re looking to purchase a home or a car with credit in the near future, you might want to hold off on saving $20 on your next purchase on your new JC Penny Credit Card.
High Interest Rates
In addition to a short-term drop in your credit score, you’ll also find that retail credit cards come with some of the highest interest rates in the business. A low-interest credit card from a bank will usually come with a rate of 10% or slightly less.
A good rewards card that comes with a $500 cash bonus or 50,000 frequent flyer miles will usually come with a rate between 15% and 18% if you have good credit. Store credit cards will frequently see rates that are in the neighborhood of 25% or higher. Some will go even higher.
It’s true that you won’t pay a penny of interest if you can pay off your entire balance every month, but if you have a month where you can’t, the interest will pile up quickly.
Be Aware of Deferred Interest
Many furniture stores or home improvement stores that offer big-ticket items will have offers of six months same as cash as long as you use the store’s credit card. In other words, as long as you can pay off your purchase before the six months are up, you’ll pay no interest whatsoever.
This can allow you to spread out the cost of your purchase, but there are dangers involved. The fine print on these store credit card purchases usually states that you’ll be charged interest for the full six months if you fail to pay it off within the interest-free period. This could add up to hundreds in additional costs. You’ll definitely want to pay off the bill before this interest charge hits.
The Temptation
Many stores will offer additional benefits for spending money on the card. You might earn a few points that you can redeem for merchandise. You might also get an offer of a special discount on your next purchase.
The feeling that you’re getting more for your money can cause you to spend more money than you’d otherwise spend. This will not help you in the long run because you’ll have trouble saving money for emergencies or for your retirement.
The Limitations
There are limitations that come from having only a retail store’s credit card. The first should be pretty obvious. Most retail store cards will only work at the store that has it’s logo on the front of the card.
There are exceptions like the Walmart card noted above. These act much like cash-back cards from banks like Citi or Chase, but cards from stores like Kohl’s or Old Navy will only work at Kohl’s or Old Navy. Additionally, store cards tend to come with a low credit limit. Sometimes, these limits will be in the $500 to $1,000 range. Using up a credit inquiry for a one-time 10% discount and a $500 credit limit at one store may not be worth the effort.
The Benefits of Store Credit Cards
While there are limitations to retail credit cards, there can be some decent benefits. If you limit yourself to purchases up to a low credit limit, a store credit card might help you stay within your budget.
The discounts that come from having a store credit card can also benefit you as long as you avoid spending more than you’d spend anyway. It’s a good idea to focus on only the store or stores that you frequent on a regular basis.
Another benefit of holding a store credit card is the possibility that it will build your credit score if you use it responsibly. The approval standards for these cards are sometimes lower than more common bank cards, and this can benefit younger people who need to build a credit profile.
Conclusion
There are a few benefits that come from holding a store’s credit card. A six months same as cash offer can provide the ability to handle an emergency without causing major cash flow problems.
There can be rewards programs that can provide a few benefits. On the other hand, the downside might make you want to reconsider getting a retail credit card. Most are tied to one store, and they provide the same hit to your credit report as a card that’s more widely accepted.
After taking these pros and cons into consideration, you’ll be better prepared to make a decision on whether a retail credit card is right for you.