Survey: Retail Credit Cards Carry Balance Risks [2023 Holiday Shopping]

Store credit cards will often provide a reward when signing up, such as a 10% discount on the first purchase. Store credit cards may also provide additional perks, such as loyalty or cashback rewards, or additional discounts on future purchases. Additionally, store credit cards provide convenience when shopping at a [consumer’s] favorite store. Finally, store credit cards can sometimes be easier to get than a regular credit card, which may potentially benefit someone with a lower credit score or someone trying to build credit.

Store credit cards will often charge a higher interest rate than regular credit cards. These store credit cards will also often have a lower credit limit. A person will want to pay attention to these factors before signing up for a store credit card. However, if someone is trying to establish credit, they will likely have to pay a higher interest rate regardless of what card is sought. Additionally, if someone pays off their balance every month, interest rates will not matter as much.

Be sure to verify before applying for any store credit card that you’re considering what the interest rates and credit limits will be, and what potential fees may be associated with the card.

Remember, too, that applying for a new credit card will likely lower a person’s credit score, at least initially, so be strategic about when you apply, and avoid applying for multiple credit cards in a short period of time.

Having a lower credit limit on store credit cards can both help and hinder someone. This lower credit limit will hopefully prevent someone from taking on too much debt on the store credit card.

However, shopping at one’s favorite store may prompt a person to purchase more than they intended to, especially if they shop there frequently, which may quickly max out a lower credit limit. Credit utilization ratios are used to calculate a person’s credit score. If this credit utilization rate is high (such as maxing out a $500 credit limit, meaning a 100% utilization ratio), this person’s credit score will drop. People are not recommended to charge more than 10% to 30% toward their credit limit (keeping the credit utilization ratio between 10 and 30%), so a person will want to be careful about how much they charge and how much of a balance they carry. Ideally, a person will pay off the balance each month, thus bringing their credit utilization ratio back down to 0% each month.

In addition to credit utilization, be aware of how much interest will be charged if a person carries a balance from month to month, especially if they pay only the minimum monthly payments. Even on lower amounts, this interest can add up very quickly and will take time to repay if making minimum payments, especially if someone is paying higher interest rates for this store credit card. Paying interest will negate many of the benefits of receiving discounts on individual purchases.

Simple answer, “it depends.” As a rule, you should not sign up for a credit card at the register. First, if you are at the register, then you probably have the ability to pay, either in cash or with another credit card, and you should not get another card on a whim. Second, even if you think the new credit card might be a good idea, you probably do not have time to review the terms of the merchant’s card to determine if it is something you should obtain.

For example, many store cards are not a good deal. They often have high interest rates, low credit limits, and can be used only with limited businesses. On the other hand, some stores offer good discounts if you apply, and have loyalty programs that can be beneficial. Before signing up for a new card, you should take your time and weigh the pros and cons considering your shopping and financial situation.

The “green flags” are the same as any other credit card. Look for things that will make the card one you can use beneficially and that will not suddenly surprise you with high fees or interest. Remember, this card will help you improve your credit score, if you don’t get in over your head and get behind on payments.

For example, start by looking at the interest rate and the credit limit. If you don’t pay your bill in full each month, a high interest rate can really add up. Also, a low credit limit means you may not be able to purchase what you want, and if you inadvertently go over [the limit], there is usually a high fee. And speaking of fees, be sure to check out all the fees that may be charged and in what circumstances. Do you ever pay late? How much is the late fee? Late fees can be very expensive. Also, check out the annual fee if there is one. You can probably get a regular credit card with no annual fees. Finally, on the plus side, many retailer credit cards have reward points or cash back that can be generous. If this is a business you shop with a lot, that can be a big benefit.

I do not believe that the risk of creating an unmanageable balance on a retailer-specific credit card is greater than any other card, if you shop around and compare terms and conditions. You may create an unmanageable balance with any card by not knowing the fees and interest rate, not being careful about how much you spend, and maintaining a high balance. With any card, the way to avoid an unmanageable balance is to be responsible, make timely payments, be aware of your credit limit, and don’t charge [a purchase] when you are not sure you will be able to make the payments.