Should you Consider a Retail Credit Card?

Generally, consumers should use as little credit as possible, and that means having only one or a few credit cards. Knowing that might cause you to wonder, should a retail store credit card be part of the mix?

Retail cards might include cards specific to a certain store or family of stores, or to an online retailer, like Amazon. A retailer might issue their own credit card, valid only at their stores, or it may be a major credit card, with a Visa or MasterCard logo, which is valid anywhere. Whether you should sign up for a retail card might depend on your specific circumstances, but there are some factors for everyone to consider.

Related Article: What to Consider Before Getting Your First Credit Card

Why you might consider getting a retail credit card

They’re Relatively Easy to Get

When you sign up for a credit card at the checkout counter, or online through a retailer’s app or website, you’re typically more likely to be approved for credit than if you apply for a traditional credit card through a bank or major credit card company.

If you’re young and new to credit, or working to re-establish credit after a disruption like bankruptcy, you might find a retail card an attractive option because they are quicker to approve applications.

Can be Used to Improve Your Credit

Like we just mentioned, people with little or poor credit might appreciate that a retail credit card is easier to get. This makes it a good tool for building credit.

One factor that is important is that a credit card must be used in order to generate a credit history and score for the user. If you have a card for a particular retailer, you’re more likely to use that card regularly, that regular activity generates good data to help you build a credit score—if you make your payments on time every month. If you miss payments or exceed your credit limit, you could end up doing more harm than good.

Traditionally, credit experts used to advise new credit users to get a retail loan, like when buying furniture or a major appliance. This kind of loan would give young consumers the chance to pay off a single purchase over multiple payments, and prove they can handle carrying debt from month to month. The problem is, the majority of businesses no longer offer that type of loan —most furniture and appliance stores will offer you their credit card instead. The same principle applies—if you get the store card and pay off your appliance/furniture purchase responsibly, you will do a lot to establish your creditworthiness. That is, assuming you don’t use the credit card for a spending spree or miss any payments.

Learn More: Quick Ways to Improve Your Credit Score

They Come with Many of Rewards and Incentives

One of the reasons retailers offer their own credit cards is to generate loyalty. If you have a credit account with a particular store, you’re more likely to shop there than the alternative.

To sweeten the deal, creditors tend to offer special perks or discounts for shoppers who use their card., We’ve all heard offers at the register, where signing up for a card will get you a large one-time discount, but some cards offer a permanent discount for shoppers. Users of the Target Red Card, for example, get an extra 5% off on their purchases at Target stores using the Target card. Other retailers might offer free shipping for online orders if made with that retailer’s credit card.

Limited Damage if You Choose the Correct Retailer’s Card

One potential advantage is that you can control how much damage you might be able to do to your own credit by choosing the right retail credit card.

If you get a card that’s only good at one retailer’s locations, then you won’t have lots of opportunities to use the card all over town and max out your credit limit. For new credit users, this advantage shouldn’t be underestimated. In fact, we often recommend gas station cards for new credit users like college students. The thinking goes that if you only use the card for one kind of purchase, but use it regularly and pay off your balance every month, you generate good activity to build a score, without paying a lot of interest. Gas station cards fit the bill perfectly, assuming you only use them at the pump when filling up and don’t shop in gas station convenience stores with them.

Large Introductory Benefits

We talked about introductory benefits, like a big one-time discount on your first purchase. But another common perk for new retail cards is a 0% introductory rate. If you buy something big, like the furniture or appliances we discussed earlier, you can really benefit from six months or a year of no interest. Plan to pay off the debt over that timeline and you’ll avoid interest charges while establishing a solid payment history.

Why You Shouldn’t Get a Retail Card

High Rates

Retail cards tend to be very expensive. They carry among the highest interest rates in the credit card industry.  Rates are always fluctuating, but right now the typical store card should be expected to come with a rate of around 25%. That’s very high by typical credit card standards, and compared to other kinds of loans.

Lower Limits

A major factor in establishing a credit score is your utilization rate, the amount of credit you use as compared to your credit card limits. The smaller the percentage of your available credit you’re using, the better it is for your score. A concern with retail cards is that they may have a smaller overall limit, which forces you to use a greater percentage of the credit available to you when making a major purchase.

For example, you might get $1,000 credit limit from a retail store. If you buy a $700 refrigerator, you’re using 70% of your available credit. This is a high utilization rate and will lower your credit score until you’ve paid the balance down. But if you apply for a traditional credit card and get a $7,500 limit, then the same refrigerator uses less than 10% of your available credit. 10% or less is the sweet spot for credit utilization that everyone should strive for, and is very good for your credit score.

If building good credit is your goal, the lower limits offered by retail cards should be considered when making major purchases.

Limited Outlets

Whether this is a pro or con for retail cards depends on you. We said earlier that it can be good to limit where you can use your credit—this is especially true if there’s any danger of you overspending or misusing credit. But if you are a savvy credit user, you may find a particular retailer’s card limiting if you can’t use it everywhere. For a lot of retail cards, it’s possible to use them everywhere, you simply give up the perks that come with using them at that particular kind of store.

Rewards are Less Frequent

The rewards and discounts that come with retail cards can be significant, but they only come if you use them with that particular retailer. Many traditional bank credit cards come with great rewards that you get no matter where you use the card. Some people get a card with a reward they especially value (like travel points) and do all of their shopping on that card to build up bigger rewards. As long as they can afford to pay that card off every month, they can earn a lot of rewards, and certainly more than if they’re only rewarded for shopping at a particular retailer.

They Can be a Symptom of a Debt Problem

One thing we’ve learned from more than 45 years of providing credit coaching is that having too many cards is a sign of a debt problem. And people who sign up for store credit cards at the checkout counter tend to have too many credit cards.

If you’re considering a store card, but you already have one or more credit cards, you should stop and ask yourself whether you’re taking on more debt than you can handle, and if the rewards are really worth the financial risk.

Related Article: 10 Warning Signs You Have Debt Problems

They Make You Spend More

A retail store card won’t help you if you have a shopping problem, or a weakness for impulse buying. These cards make it easier to spend more at your favorite retailer, and if you’re trying to learn to budget, this might not be the best kind of credit card to carry with you.

People with retail cards can often be lured into spending more to take advantage of particular offers, and everything they buy is tracked by the retailer. The more information your favorite retailers have about your shopping habits, the more effectively they can market to you. This might be a good thing—why not generate the kinds of offers you’ll actually benefit from?—but if you’ve got any kind of spending problem, you might not like the power a store card will give retailers to entice you to spend.

Steep Penalty Rates

Retail cards typically carry steep penalty rates. If you are late or miss a payment, an already high interest rate can skyrocket even higher. You might be paying 24% normally, and see that rate shoot up to 29.99% when penalties are applied. These rates are much higher than typical bank credit cards, which average just under 17% right now for new accounts.

Another thing to be careful of is that penalty rates can be retroactive. If you are paying a 0% introductory rate for six months, but don’t get the balance paid off within that time, then the full interest rate can kick in for the entire balance, and you’ll start paying interest as if you never had the introductory benefit. 

With all of these negatives, it might seem like retail cards are always a bad idea. That’s not necessarily true—your individual circumstances might make a retail card a good idea, even with the higher rates those cards bring.

If you’re looking into a retail card because of your credit, consider getting a credit report review to ensure you’re taking the best steps you can to improve your credit over time.