Shoppers Beware: What To Watch For In Retail Store Credit Cards

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Advertisements on television, online, circulars and banners tout discounts and deals. Sometimes, to access them, you’re offered to open a retail store credit card. While discounts and freebies are enticing, they aren’t always worth the high interest rates, damage to your credit score, or other fees.

In deciding on a card, consider whether you can actually enjoy the full discounts of the card.

What Is A Retail Store Credit Card?

Retail store credit cards allow users to charge merchandise or services offered by the store. With a private-label store card, or “closed loop” card, you’re limited to that retailer who issued the card.

Other retail stores may co-brand their cards, getting the financial backing for credit from a major provider such as MasterCard MA or Visa V. These co-branded cards operate more as traditional, regular credit cards. If you get one of these cards, you have more places to use them. However, to access these broader choices, you must meet more stringent credit standards. You can qualify for a closed-loop retail store credit card with lower credit scores than if you seek a traditional credit card.

Benefits Of Retail Store Credit Cards

Retail store credit cards can help users establish and maintain a good credit history. Relatively small purchases, whether the user’s choice or due to a small credit limit, result in generally manageable monthly payments.

Also, when you open these accounts but use them sparingly, you increase the available credit. This generates a lower credit utilization rate, which is the total debt you owe on cards divided by the total of your credit limits. High credit scores can lead to favorable mortgage or car loan terms and can factor into your homeowner's insurance premiums.

The motivation for retail stores to make credit available to consumers affords savings. Introductory zero or low rates and deep merchandise discounts accompany these store credit cards. For high dollars purchases from furniture or electronics retailers, opening the store card may come with zero interest if you pay off the purchase by a certain time, such as 12 months or 18 months. By paying the charge in full before you get the statement, you avoid interest and can take full advantage of the sale price or discount.

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What To Watch Out For

If you don’t pay off the big charge before the interest-free period expires, most retail card issuers will assess interest from the date of purchase. That could significantly balloon the balance owed. Further, interest rates on retail store credit cards run higher than those not issued by stores. That means you could pay more for the discounted item than if you paid regular price without charging the purchase.

Also, a non-judicious opening of store cards could erode your credit score. When you open many store accounts in a short period of time, you decrease the average age of your accounts. You want your credit history to show an older average age of credit accounts to engender confidence by lenders, finance companies and credit card companies in your ability to handle credit. FICO basis 15 percent of your credit report on the average length of your credit accounts.

Who Are Retail Store Credit Cards Good For?

Retail store credit cards can build (or rebuild) credit histories. For many consumers, the store cards are their first foray into credit. Even low credit scores do not deter stores from approving applicants for store credit. Thus, if you have not used credit or have low credit scores, you might benefit from a retail store credit card. Since you’ll likely have a small credit limit at first, you can demonstrate the ability to repay with relatively low monthly payments.

To get the fullest possible savings from a retail store credit card, pay off the charges before the interest-free period ends. Minimum or small payments on these cards may eliminate the benefits of the discounts that entice you to these store credit cards.

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Posted In: EducationPersonal FinanceGeneral
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