5 Things to Watch Out For When Using a Store Credit Card to Build Credit

what to watch out for with store cards

By Ben Luthi

In the right situation, store credit cards can be an excellent way to build credit when you have none or yours is in bad shape. Most store credit cards report your account activity to the three credit bureaus, which can help you build your credit through responsible use and on-time monthly payments.

But some potential drawbacks can make a store card more trouble than it’s worth. As you consider whether a store credit card is right for you, here are five potential pitfalls to watch out for.

1 - It may not be accepted everywhere

There are two types of store credit cards: open-loop and closed-loop. Open-loop cards run payments through one of the major payment networks, such as Visa, Mastercard or American Express. As a result, you can use the card anywhere those networks are accepted. These are sometimes co-branded cards.

On the flip side, you can only use a closed-loop card with that specific retailer. That means that if you want to use the card and generate a positive payment history, you’d need to spend money at that retailer. If you don’t shop there regularly, you may end up spending money unnecessarily.

If your primary goal is to use the card to build credit, consider getting an open-loop card, so you have flexibility with where you can use it.

You could also consider a secured credit card as an alternative to a store card. While a secured card comes with its own pros and cons, and includes a security deposit, these cards are generally more flexible and your deposit is refundable if you decide to close the account.

2 - Your credit limit may be low

Store credit card issuers often offer low credit limits to their cardholders—that’s especially the case if your credit is poor or non-existent.

If your credit limit is just a few hundred dollars, using it regularly could actually hurt your credit. That’s because your credit utilization rate—the card’s balance divided by its credit limit—is an important factor in your FICO credit score.

The lower your credit utilization ratio is the better, but credit experts typically recommend keeping it below 30% at most. This means that if your credit limit is $300, it’s best to keep your balance below $90.

You can do this by using the card sparingly or making multiple payments throughout the month. As long as you keep the balance relatively low, it can help improve your credit.

3 - It’s a credit card, not a coupon

Store credit cards often offer different benefits, such as discounts, rewards, access to special shopping events and more. These perks can help you save money on things you’re already planning to buy.

“I was recently married and we wanted a dining room table and buffet to go in our recently purchased townhome,” says Philip Taylor, the creator of Part-Time Money and founder of FinCon, an annual financial media conference. “We noticed they had a 10% cashback offer, so we figured we could buy the table and buffet and some of the chairs, and then use the rewards to purchase the remaining chairs. It worked out.”

If you’re not careful, though, the extra offers could entice you to spend more than you would otherwise.

As a result, it’s best to avoid store credit cards if you’ve dealt with overspending in the past. And if you’re afraid you may get caught up in the offers and spend money on things you don’t need, avoid credit cards altogether.

4 - Interest rates are steep

In addition to low credit limits, store credit cards also typically charge high interest rates (Annual Percentage Rates) upwards of 20%. Paying interest won’t affect your credit in any way, but it can have an impact on your finances.

You can avoid paying interest by using the card only when you can pay back what you charge and then by paying your balance in full each month. Otherwise, you could end up with credit card debt that could follow you for years.

At the very least, set up automatic payments for the minimum payment amount. That way, you don’t accidentally miss a payment or make late payments and have it affect your credit.

With Taylor’s Pottery Barn purchase, a missed payment caused credit woes for years.

“We had the money to pay it off in full,” he says. “Life was busy with a new house and two jobs. I'm sure I tried calling to ask forgiveness, but they didn't budge and the damage was done.”

The impact on Taylor’s credit was such that he relied on his wife’s credit score when the couple bought a second home a few years later.

“There was nothing I could do about that ding,” he adds.

Another thing to watch out for? Some retail cards charge an annual fee. Make sure you understand the fee structure before signing up for any credit card offers.

5 - You only need one

Hundreds of retailers offer store credit cards, and if you have more than one favorite, you may be tempted to get multiple store cards.

Having more than one credit card account can help improve your credit, as long as you use them responsibly. But it’s important to remember that the more store credit cards you have, the more you open yourself up to overspending for the sake of building credit or getting special discounts or rewards points.

If you notice that you start to overspend, try switching to cash for a while. You can always keep your credit accounts open so they continue to help the length of your credit history, which counts for 15% of your credit score, without actually using the card.

Also, keep in mind that virtually every time you apply for a credit card, the card issuer runs a hard inquiry on your credit report. Each inquiry can knock a few points off your credit score, but if you apply for several credit cards in a short period, it can have a compounding effect and make it difficult to get approved for other credit accounts when you actually need them.

The bottom line

Store credit cards can be worth it if you already spend a lot with a specific retailer, aren’t concerned about overspending, and need some help building your credit history. That said, it’s important to understand both the benefits and drawbacks of having such a credit card.

Also, keep in mind that one store credit card isn’t going to solve all of your credit problems. As your credit improves over time, adding more credit accounts into the mix—when you need them—will help you continue establishing a solid credit history.

About the author

Ben Luthi is a personal finance writer who has written for NerdWallet, Student Loan Hero, US News and World Report, as well as other major media outlets. He holds a bachelor’s degree in finance from Brigham Young University.

Written on November 19, 2019

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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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