Being Credit Smart: Store Credit Cards
October 22, 2015
Eileen L., Financial Expert
I’m sure you’ve been asked to open a store credit card when shopping. It can seem like a good deal: you can often save 15% on your first purchase with the card. But how do store cards measure up? What happens to your credit when you open a store card?
When I first started researching store cards, there was a lot not to like. I looked at 22 stores in Lansing that offer a store credit card. Over 80% of the cards had an APR higher than 20%! I’m used to 8.9% APR with my MSUFCU Platinum Visa, so those numbers seem really high. Even with 15% off my first purchase, would a store card ever be worth it?
A high APR isn’t always a reason to rule out store cards. If you pay your balance in full every month, you’ll never pay a finance charge. But you have to consider your spending habits. If you’ll consistently carry a balance on a store card or start spending more than usual at that store, think twice!
What about the effect store cards have on your credit? It's usually quite easy to get approved for a store card. Stores and the banks stores work with want as many people as possible to have their store card. They hope having a card will affect your judgement and you'll spend a lot more money at the store.
But, if you pay attention to your spending and pay your balance in full, store cards can help you build credit. The main way they can do this is by increasing your overall credit limit. Credit company computers calculate your credit score based on a lot of factors. One of them is how much debt you have. This is 30% of your score and includes your loan balances and your credit utilization ratio.
A store card might be a good secondary credit card to decrease your credit utilization ratio. Remember this only works if you don't overuse your store card. If your overall credit limit is twice as high but you spend twice as much, your credit utilization ratio won't change!
Opening a new credit card affects your credit in other ways. It changes the average age of your credit accounts (15% of your score). And it shows that you are opening new accounts (10% of your score). Opening a new card can negatively affect these parts of your score. To avoid a potential hit to your score, you can ask your primary financial institution to increase the limit on current credit card.
Like every other form of credit, a store card can be a good choice if you use it wisely. Make sure you think about your spending habits and the potential effect on your credit score before applying for a card at the checkout.