Why you should avoid adding a store or retail credit card to your wallet

When you have a poor credit score, it can be tempting to sign up for credit cards at stores that are actually willing to issue credit to you. Some consumers rack up store credit cards because of discounts and promotional rates.

However, in most cases, retail credit cards are subpar when compared to traditional general purpose credit cards.

Limited use

Retail or store credit cards can only be used at specific stores. Although some companies have a family of brands that you can use their store card at, you’re still stuck with a card that you have limited use for.

Retailers often offer discounts and introductory interest rates to entice consumers to sign up for their credit cards. But, if you sign up for a store credit card on a whim, solely to get a discount on what you know may possibly be your only purchase on the card, it may not be worth it. As with any new credit card, your credit score will decrease because of the new tradeline and because of any hard inquiry that was performed. Consider that the next time that you’re faced with the temptation to sign up for a store credit card solely for a discount.

Low and stagnant credit limit

Store credit cards aren’t know for big credit limits. Usually, retail credit cards have low limits in the hundreds. One could argue that the low limits are indicative of just how sparingly retailers predict customers will use their store cards. 

High utilization rate

With a low credit limit comes the risk of having a high credit utilization rate. If your store credit card has a $500 limit, it will take just a $155 purchase to put you over the 30% credit utilization rate that creditors don’t like you to go over.

While utilization isn’t important to some consumers, if you’re actively monitoring your credit and want to remain within the 30% utilization threshold, you would find it challenging to use a low-limit card.

You could credit cycle and pay the balance throughout the billing cycle to free up additional credit. But, in doing so, you’d miss out on credit card float, which is possibly the most rewarding reason to use a credit card. 

Higher interest rate

Retail credit cards usually have higher interest rates in comparison to traditional credit cards. If you do use your store credit card, you will have two repayment options:

• Pay the entire balance before interest accrues.
• Carry a balance and pay accrued interest.

Of course, there’s a hypothetical scenario in which the retailer is offering promotional payment terms. But, you shouldn’t be forced to rely on the possibility of a random promotion that might become available at an equally random point in the year. Instead, you should shop for a general purpose credit card and choose the card with an interest rate that you’d feel comfortable carrying a balance with.

Possible closure

The future of a retailer and its credit card are both unknown. While the same can be said for general purpose credit cards, you’re still more likely to have a retail card closed than a traditional credit card. 

Customers of traditional and store credit cards all face the risk of having dormant credit cards closed by the issuers. With a traditional credit card, you can use your card anywhere. So, you can find a practical way to use the card to avoid account closure. However, with retail credit cards, you will need to use your card at one or a few select stores. In doing so, you may be forced to purchase something that you don’t actually want and ultimately waste money just to keep the store credit line open.

And, it’s not just the closure of dormant accounts that consumers must worry about. The retailer may choose to stop offering their store card altogether.

Alternatives to traditional unsecured credit cards

Consumers might turn to retail cards after being turned down for traditional unsecured credit cards. But, even at that point, retail credit cards shouldn’t be the next stop.

Secured credit cards are an option for someone who can’t get an unsecured credit card. However, some consumers may find it hard to meet the deposit requirement for a secured card.

If you find yourself in a situation where you must rely on getting credit in the form of a retail credit card, do so cautiously and sparingly. You need very few credit cards to build your credit, and having multiple low-limit retail (or traditional) credit cards will eventually do more harm than good.