Opening a merchant charge account is usually quick and easy. You often receive discounts on your first purchase, just for applying. While paying the monthly balances can help rebuild your credit, these cards can also hurt it.
Advantages of Store Charge Cards
There are several advantages that often come with merchant credit cards, and make them an attractive option for many consumers.
- Exclusive offers and discounts
The initial discount offered, when you sign-up, is one of the main reasons consumers open store credit accounts. These can average from 15 up to 30 percent, depending on the item. On some large purchases, this can result in significant savings.
Some retailers also offer ongoing discounts to their cardholders throughout the year.
- Easy access to credit
When you are trying to rebuild your credit, getting approved for a traditional line of credit is difficult. Retailers often do not have the same criteria for approval, especially since their cards come with a spending limit.
If you need to purchase an item that you can’t afford at the time, a card offered by the retailer might be the best option.
- Help rebuild credit
Retail charge accounts can help you raise a low score, but only if the activity is reported to the main three credit bureaus. (Experian, Equifax and TransUnion)
To rebuild your credit with an in-store line of credit, you Must make every monthly payment on time. Failing to do so, will cause your score to drop. The missed or past due payment can also stay on your credit report for up to seven years.
Disadvantages of Retail Charge Cards
These cards might seem like an ideal way to start repairing your credit, but they can come with a few disadvantages. Knowing what they are, before applying, can prevent you from potentially lowering your score even further.
- High interest rates
This is a significant difference, especially if the balance due isn’t paid in full.
If you only make the minimum payment each month the accrued interest could cause the final cost of your purchase to double, even with the initial “signup” discount.
- Limited places of use
You can find some retail cards that are part of the Visa or Mastercard network. These can be used anywhere the logoed cards are accepted. Usually, you will only be able to use it in the store that issued it. This limits what you can use the card for.
Referred to as “close-loop cards”, applying for one might only be beneficial if you make frequent purchases at that store.
- Few rewards
Typically, there are a few rewards and incentives offered after the first discount. The only drawback is that they usually must be used at that store. If you are a frequent shopper, it might be financially worth it.
If not, you might want to consider applying for a secured credit card.
- Credit limits are lower
Credit utilization is an important part of your score, especially if you are trying to rebuild it.
This can be difficult when it has a low limit. If the card has a $1,000 limit and your balance due is $500, the utilization rate is 50 percent. This can cause your score to drop, instead of raising it.
Cards with higher limits can have a lower rate of utilization, but they can also be harder to get if your score is subpar.
Repairing Your Score with a Retail Credit Card
Retail charge cards can help you rebuild your credit, if you know how to use it. These simple tips will ensure that you don’t overspend, and they can even show you how to add a few points to your FICO score.
- Don’t overspend
Just because you now have a line of credit at your favorite store, doesn’t mean you can buy everything you want.
Stick with your normal spending patterns.
Only use the card for items you need or were already planning to buy. This way, you can take advantage of the discounts and still be able to pay the monthly balance.
- Pay the balances off
It is crucial to make the monthly payments on time, late and missed ones will hurt your score. Whenever possible, pay off the total balance. This way you’ll avoid the high interest rates.
While making the minimum monthly payments can will help build a credit history, interest will be added until the total amount due is paid off. Over time, it can quickly add up.
- Regularly use the card
You don’t want to run-up the card’s balance, but you still want to use it often. Frequent use combined with on-time payments can boost your score, and build a strong history. If the card isn’t used, eventually it will be marked as “inactive”. This won’t hurt your score, but it also doesn’t help it.
- Pay attention to your credit utilization
This rate is an important part of your overall score. It is used to determine “creditworthiness”, and will be affected by the use of your retail card.
Credit utilization rates are calculated by how much available credit you’ve used, divided by the limits. Optimally, you want a usage rate below 30 percent. This can be difficult if the retail credit card has a low limit and you’re carrying a high balance.
You’ll want to keep this is mind, every time you use an in-store credit card.
In-Store Credit Cards Can Be Worth It
There are drawbacks to retail charge cards, but they also have several advantages. They can help you make necessary purchases not affordable with your available funds, save money and even repair poor credit scores.
Before you succumb to the pressure at the register and apply for a retail credit card, consider how it will affect you financially. If you decide that it is something that will help you, then these lines of credit will be worth it for you. When used responsibly, they can even help you rebuild your credit.