When you are at the check-out register, often times you are offered to apply for a new credit card issued by that retailer in order to get 5% off the purchase or six months of “special financing,” which waives interest if paid in full within six months. Now that sounds really good on the surface, but what you don’t know is that if you don’t pay off the entire balance before the six months ends, these store credit cards will charge you interest rates retroactive from the date you bought the stuff.
So, if you can’t pay off the full balance in a month and have to roll into the next month, chances are you are going to pay more with a retail store credit card than if you had a credit card through your bank or credit union because for new accounts, the standard APR interest rate charged by store credit cards is 26.99%, almost twice as much as the typical credit cards issued by major banks.
Lower credit limits
Second thing you should know before you apply for a store credit card is that store credit cards tend to have lower credit limits than cards that you can get from a big bank. Why is that important to you? Well, the percentage of the credit limit that you use each month is a big factor in your credit score. Here’s an example of how this works.
Let’s say you apply for a store credit card and it’s typical that you will get approved for a card with a $500 credit limit. So, when you go out and spend say $250 in a month, you have used up 50% of available credit on that card. Now imagine another situation where you apply for a cash back credit card from a big bank like Chase. Over there, you are more likely to get approved for say $1,000 credit limit. So, when you go out and spend the same $250, you are only using 25% of your credit limit. So, why is this important you ask? Well, the way credit scoring models work is that closer you get to maxing out your card, or the more you use relative to your credit limit on the card, the worst it is for your credit score. Credit scoring models likes the 25% utilization rate much better than 50% rate.
So if you have lower credit limits like the store credit cards tend to have, you could potentially damage your credit limit pretty easily by achieving a very high utilization rate.
Can’t use it everywhere
The third thing you should know before you apply for a store credit card is that you may only be able to use at that store. If it doesn’t say Visa, MasterCard, American Express or Discover somewhere on the actual credit card or on the application for the credit card, chances are that you will only be able to use it only at that particular brand of store and not all the places that credit cards are accepted. This is especially problematic if this is your first and only credit card and want to be able to use it at other places, not just at the store that you got this credit card from.
Some stores have two different versions of the card. For example, Walmart has the Walmart credit card that can only be used at Walmart and Walmart affiliated stores like Sam’s Club. But they also have Walmart MasterCard which can be used at anyplace where MasterCard is accepted. So they are two very similar cards, but they have different restrictions as to where you can use them.
Solution
Depending on your goal, most consumers would be much better of by getting a card that gives you up to 5% cash back or 0% APR for up to 18 months from one of the big banks than be tempted to save a little bit of money and apply for one of the cards issued by the store that you are in at the time.