“Would you like to save 20% on today’s purchase?”
We’ve all heard this sales pitch to apply for the store credit card before. It’s such an easy temptation to say yes, apply, get the discount, and tell ourselves we’ll cancel the card later. Or we convince ourselves we’ll end up saving money in the long run since we already shop there on a regular basis anyway. So why not?
Stop. Right. There.
There is a reason, several in fact, that Credit Karma always gives advice to think twice about getting a retail card. Here’s a quick and dirty, LearnVest-exclusive breakdown of how retail cards work. And you can decide for yourself whether or not they are worth it.
The APR Is Steeper And Temptation Is Higher
The number one reason we discourage consumers from getting a store credit card is that they are virtually designed to make money off of you. Retail credit cards have a higher APR, around 20% and up, because these cards are often the first bill consumers default on versus general purpose credit cards. Issuers thus offset this high risk with a high interest rate, which means if you don’t pay off your balance, you are essentially pay them more to shop there. Plus, retailers often make a 100% mark-up on the products they sell; they doubly squeeze money out of you when you buy at the store and use the store credit card. Take a higher interest rate, sweeten the deal with tempting discounts and incentives to shop at your favorite retail store—and you have a recipe to rack up debt and steep monthly interest charges.
It Will Impact Your Credit Score In More Ways Than One
Your credit score can suffer in multiple ways—you will get a hard inquiry hit, worth a few damage points on your credit score and will stay on your credit report for 2 years; increased debt can weigh down your credit score; if you close your retail credit card, it could hurt your score and the mark will stay on your credit report for 7 years. Plus, retail cards tend to offer low credit limits worth a couple hundred dollars to a thousand. More available credit is typically a good sign for your credit score. But if you shop constantly or purchase one big-ticket item, it’s easy to run up a high balance when you have a low limit. This impacts your credit utilization rate, and the higher your utilization rate, the more negative effect on your credit score.
It’s Easier To Obtain A Retail Credit Card Than A Regular Credit Card
The CARD Act rules apply to retail credit cards the same as every other credit card except for one rule: Retail credit cards, unlike regular cards, are not required to verify the consumers’ ability to pay bills. Many retailers complained that demanding proof of income in public at the cash register, where many of these applications are dealt with, would be a violation of privacy. Thus, retailers have more lax standards when it comes of applying for a credit card.
There Are Different Kinds Of Retail Cards
There are two primary types of retail cards. A store credit card from the retailer typically comes with perks and discounts specific to that store when you purchase at that score. “Co-branded” credit cards bear a Visa, Discover, MasterCard, or American Express logo along with the store’s brand, and can be used to spend and earn rewards anywhere that the co-branded payment network is accepted. A co-branded retail card offers more flexibility beyond in-store perks and more opportunities to earn rewards when you are shopping anywhere.
Rewards May Not Be As Great As They Sound
You get 15% off purchases, free gift wrapping, and special freebies on your birthday. But if you racked up a balance and pay 20% in interest every month, your discount savings are wiped out from interest charges faster than you can keep up with your debt. In addition, CreditCards.com reports that retailers are scaling back rewards programs, jacking up interest rates, and closing some accounts.
Using A Retail Card Will Build Credit
One plus is that, like all other types of credit card, using your retail card will help you build your credit score (as long as debt and high credit utilization doesn’t damage your credit extensively).
So, Is It Worth It?
Consider your habits. If discounts and store incentives send you rushing to your favorite retailer to shop every weekend, then a retail credit card will get you into tons of debt. If you tend to carry a balance month to month, you’ll be paying through the nose in high interest.
If you can use a retail card effectively as a savings tool and pay off the card in full immediately, then you can make a case for responsibly managing a retail card. Keep in mind that if you really want a retail credit card for shopping perks, shop and compare with general rewards credit cards (to earn cash or even gift cards to your favorite retailers) to see which card can better maximize rewards benefits and offer you more flexible terms.
Do you have any credit questions? Ask Credit Karma In The Comments!