Key Drawbacks to Store Credit Cards
Store credit cards can be a low hanging fruit because companies make it easy to qualify, fast to apply, and provide incentives to entice enrollment. However, there are several features of store credit cards, which might have you reconsidering the next time a clerk asks you to sign up.
- High-interest rates. Most store cards charge between 20 and 30% in interest. Carrying a balance leads to high-interest payments and makes it difficult to pay off the card.
- Low initial credit limits which can help rebuild credit or provide an avenue to establish credit when you have a thin file. However, lower limits can hurt your credit score because purchases raise your utilization ratio significantly even when you pay the balance off each month. Utilization considers the credit limit compared to your balance. Companies report your balance to the credit bureau the same day each month, but typically not on your due date. Low available limits can result in high utilization even with small purchases, which can negatively impact your credit, accounting for 30% of the FICO score.
- Deferred rather than interest-free promotions. Deferred interest works differently than interest-free promotions. With deferred offers, interest begins on the date of purchase, but does not charge to the account if you pay the full promotional balance before the end date. Failure to meet this requirement results in interest charges from the date of purchase, negating the benefit of delayed interest. Combining promotional and non-promotional charges can make it difficult to track and pay off balances on time.
Before signing up for a store credit card, consider the benefits. You gain the most when you do not carry a balance. When using the card for deferred interest purchases, refrain from using the card again until paying off the promotional balance.