When you shop at retailers in-store or online, chances are you've been asked at checkout if you want to apply for a store card. They frequently come with tempting offers — sign up and get a huge discount on your purchase — but there are several drawbacks to consider before you apply.
CNBC Select spoke with two financial experts to get their take on store cards, what you should consider before applying and alternative credit cards to consider if you're looking to build credit.
What to watch out for with store cards
Store cards are notorious for having less than stellar terms. Low credit limits, high interest rates and limited usability are the biggest downsides, credit expert John Ulzheimer, formerly of FICO and Equifax, tells CNBC Select.
Low credit limits
A low credit limit is a red flag, because it doesn't really help your credit score, especially if you're using the majority of your credit limit. An important factor of your credit score is your credit utilization rate (CUR). This is the total amount of credit you're using (aka your balance) compared to your total credit limit.
For example, if a store card gives you a $300 credit limit and you have a $270 balance, you'll have a 90% CUR — which is very high. Financial experts generally recommend have a CUR below 30%.
High interest rates
Store cards typically have very high interest rates that can cause you to quickly rack up debt if you carry a balance month to month. The Bloomingdale's credit card has one of the highest APRs for a store card at 26.99% variable (see rates and fees). We recommend that you always pay your bill on time and in full in order to avoid high interest charges. Store discounts sound great, but it will be costly if you charge more to your card than you can afford to pay back by your due date.
Limited use
You can usually only use a store card at the issuing store, which can be a problem if you want (or need) to use credit other places. You'll need to have another credit card for purchases outside the issuing store, which may be a hassle if you only want one credit card.
However, some stores may provide the option to apply for a Visa, Mastercard or American Express backed card, which you can use anywhere those cards are accepted. These kinds of store cards usually offer low rewards, or no rewards at all, on purchases not made at the store, though there are some exceptions. For example, one of the better store branded cards is the Prime Visa. It can be used anywhere Visa is accepted and offers unlimited 2% back at gas stations, restaurants, and on local transit and commuting (including rideshare).
When is it OK to sign up for a store card?
While store cards have drawbacks, that doesn't mean they're a terrible option. Many big box retailers, such as Target, Amazon and Walmart offer store cards that can provide benefits to frequent consumers. If you're a responsible cardholder, you may want to take advantage of the benefits offered by store cards.
"If you do tend to shop regularly at a store, you might benefit from their loyalty program in the long run." Priya Malani, founder and CEO of Stash Wealth, tells CNBC Select.
The Target RedCard™, for example, offers an instant 5% discount at checkout, which can add up to great savings on your Target runs. However, you need to be diligent about paying off your balance since the card has a high 22.90% variable APR (see rates and fees).
Discounts are great and all, but Malani cautions consumers to make sure they can afford their purchases: "If you can't pay the bill in full, the interest rate on the balance might actually negate the savings and leave you owing more than the cost of the purchase in the first place."
Alternatives to store cards
If you're looking to build or rebuild credit, a store card can seem enticing since they often come with more lenient credit score requirements, but both Malani and Ulzheimer recommend secured cards as an alternative to store cards. A secured card is nearly identical to an unsecured card in that you receive a credit limit, can incur interest charges and may even earn rewards, but you must make a security deposit in order to receive a line of credit. The security deposit typically becomes your credit limit.
The best secured credit cards have no annual fee and a smooth transition to an unsecured card. You can even earn rewards with select secured cards, such as with the Discover it® Secured Credit Card — earn 2% cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter, then 1%; earn unlimited 1% cash back on all other purchases automatically.
Once you improve your credit with a secured card, you can check out the best rewards cards, cash-back cards and travel cards, which frequently offer better long-term benefits than most store cards, including some money-saving shopping discounts.
Information about the Target RedCard™, the Bloomingdale's Credit Card and the Prime Visa has been collected independently by CNBC and has not been reviewed or provided by the issuer of the cards prior to publication. If you purchase something through Select links for the Prime Visa, we may earn a commission.
For rates and fees of the Discover it® Secured Credit Card, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
Pay your balance every month
Paying the balance in full has great benefits. If you wait to pay the balance or only make the minimum payment it accrues interest. If you let this continue it can potentially get out of hand and lead to debt. Missing a payment can not only accrue interest but hurt your credit score.
What is one of the biggest dangers in using a credit card? ›
Most of your payment will go to paying interest. Since credit cards carry high interest rates, it can take a long time to pay off debt when only making the minimum payment. If you miss a credit card payment, then the bank can charge you interest on top of the original payment owed.
Is 1 credit card utilization good? ›
NerdWallet suggests using no more than 30% of your limits, and less is better. People with the best credit scores often have a credit utilization number in the single digits.
What was the main thing Vinnie did wrong? ›
What was the main thing Vinnie did wrong? He used one credit card to pay other credit card bills.
What is the biggest mistake you can make when using a credit card? ›
Not paying on time
Sometimes, schedules are busy and budgets are tight. But it's best to always pay at least part of your credit card bill on time. Missing or late credit card payments can have a big impact on your credit score and fees.
What is the golden rule of credit cards? ›
Pay on time, in full, every single month
Many people see “minimum payment” on their bill and think that's the only amount that needs to be paid in order to avoid penalties. But the reality is, interest kicks in immediately for any unpaid balance. If you're just paying the minimum, you're losing.
Which type of credit card carries the most risk? ›
Answer and Explanation: Among the types of credit card, the one that carries the most risk are: Unsecured credit cards that have variable interest rate.
What is one pitfall of credit cards? ›
If you use a card right, you'll never pay for anything outside of an annual fee. But if you pay just the minimum balance or leave any portion unpaid, you'll pay interest at the card's annual percentage rate (APR). Credit cards often charge 20% or more in interest.
What is one bad thing about credit cards? ›
Credit cards can make it easy to get into debt. It's tempting to use them to buy things you can't afford, and if you don't pay your bill on time, your debt can quickly snowball. Owing too much on your credit card, and not making your payments on time are two mistakes that will seriously damage your credit score.
How to get 800 credit score? ›
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
Compare the best credit cards for bad credit
| Credit Cards | Our Ratings | Credit Limit |
|---|
| Petal® 1 No Annual Fee Visa® Credit Card* Learn More on Petal's secure site | 4.1 Winner: Unsecured | $300 to $5,000 |
| Tomo Credit Card* Learn More on Community Federal Savings Bank's secure site | 2.4 Unsecured credit card + high limit | $100 to $30,000 |
9 more rowsYour 800 FICO® Score falls in the range of scores, from 800 to 850, that is categorized as Exceptional. Your FICO® Score is well above the average credit score, and you are likely to receive easy approvals when applying for new credit.
Do you have to be rich to have a good credit score? ›
Since income is not one of the five factors that determine a credit score, the wealthy are just as likely to have a low credit score as the people with lower income. The rich can miss payments, rely too heavily on credit, and open too many new accounts, all of which may lower their credit score.
Will skipping a credit card payment once or twice a year hurt my credit? ›
A missed or late payment can have serious negative effects on your credit score. The longer your payment is past due, the more your credit score will drop. Below, we've provided an example of the effect a 30- and 90-day missed credit card payment has on two consumers, according to FICO data.
What can increase your credit score? ›
If you want to improve your score, there are some things you can do, including:
- Paying your loans on time.
- Not getting too close to your credit limit.
- Having a long credit history.
- Making sure your credit report doesn't have errors.
Pay off your balance every month.
Avoid paying interest on your credit card purchases by paying the full balance each billing cycle. Resist the temptation to spend more than you can pay for any given month, and you'll enjoy the benefits of using a credit card without interest charges.
What is the 2 3 4 rule for credit cards? ›
The 2/3/4 rule: According to this rule, applicants are limited to two new cards in a 30-day period, three new cards in a 12-month period and four new cards in a 24-month period. The six-month or one-year rule: Some issuers may only let borrowers open a new credit card account once every six months or once a year.
What is the 15 30 rule for credit cards? ›
When you have a credit card, most people usually make one payment each month, when their statement is due. With the 15/3 credit card rule, you instead make two payments. The first payment comes 15 days before the statement's due date, and you make the second payment three days before your credit card due date.
What's the first rule of using your credit card the right way? ›
Pay your credit card bills on time
Always make at least your minimum payment each month by your statement's due date. If you miss a credit card payment, not only could your credit score take a hit, but you could also get stuck with late fees and penalty APRs.
