Friday, November 4, 2011

The Pros and Cons of Retail Credit Cards

The Pros and Cons of Retail Credit Cards

As you probably already know, many retail stores try to get you to sign up for their store credit card by offering a great discount on your current purchase. When they ask if you would like to save 15 percent today, you know you will have to apply for a credit card to get it, but before you make a quick decision, you should give this credit card some thought. New credit card accounts affect your credit score, and could cause you to go into debt if you aren’t careful. Store cards should take even more thought because they have pros and cons that other credit cards don’t have.

Retail credit cards do offer a lot of perks. If they didn’t, no one would apply for them. The following are a few of the most common pros you will see with a retail credit card.
  • Save on a single large purchase – The most obvious advantage to a retail credit card is the initial discount you get when you apply. If you are making a large purchase anyway, you will be able to save a lot more when you apply for a store card. However, if your purchase is much smaller, your initial savings may not be as great. 
  • Promotions, sales, and discounts – When you get the card, some stores offer discounts, exclusive shopping days, and other rewards for frequent customers. Some programs offer special coupons to card holders, but you should realize that some of these coupons and discounts are also offered when you sign up for the store’s email newsletter. Be aware of these similarities before you sign up for a card. 
  • Widely accepted – If the store card has a Visa, MasterCard, American Express, or Discover logo, the card will be accepted in many different places. Make sure you compare the retail card program with other rewards cards before you apply so that you will be sure that you are getting the best deal for your points. 
  • Build credit history – Those looking to improve their credit score, or those looking to establish credit in the first place, could really benefit from retail credit cards. These card issuers have been much more lenient in the past when approving credit to customers. This type of card is much easier to get, and if you don’t carry a balance from month to month and use the card sparingly over a period of time, it will really help improve your credit score.
Cons of Retail Credit Cards

Though there are many advantages to retail credit cards, there are also quite a few disadvantages.
  • High interest rates – Some store cards could have an annual percentage rate (APR) of 20% or more. If  you tend to carry a balance on your credit cards, you probably shouldn’t apply for a store card. When you have to pay the 20% interest rate, you probably won’t be saving much, if anything at all, with your cardholder discounts. Be aware of credit cards with low limits as well. With a low credit limit, it is a lot easier to rack up a high balance, which will harm your credit rating. You should try to keep the distance between your balance and your limit as wide as possible.
  • Lower credit score – Applying for new credit cards will raise a red flag for the credit bureaus. Every time you apply for a card, your score could drop as much as 30 points. Even if you never activate the card, the inquiry will stay on your report for two years. Also, applying for new cards will lower the average age of your accounts, which will affect the length of your credit history. People who sign up for many cards in a short period of time will see a much bigger drop because they are seen as more of a risk. With the holidays right around the corner, you should be very aware of the risks to your credit report should you apply for multiple cards to try to save money.
  • More temptation – When you are applying for new cards, you should always consider your spending habits. If the discounts and coupons will make you go to the store, instead of only using them when you need them, getting a store card could get you into a lot of debt. If you use the card and the discounts to buy items you don’t even want or need, a retail credit card could cause you to spend well over your budget.
Should You Apply?

This is a question only you can answer. If you need to get a loan in the next year, you will want to watch your credit score closely, and you shouldn’t be taking on any new credit cards. If you are able to pay your balances every month and resist the temptation to spend when you are getting a great deal, then you might benefit from a store card. No matter what, you will want to make sure you are getting the best deal for you. Look into other general-purpose credit cards, and take the application home or look online to compare the advantages and disadvantages of each card before you decide.

Jen Mathis is a guest post writer who writes articles on topics like business, economics, and personal finance. Jen also writes and works for a site that strives to educate readers about credit cards and how they affect your credit score.