How to Establish Credit with a Store Credit Card

How Credit Works

By Jason Steele

You know the scenario — you’re checking out with your order at a large department store or on an online store and right before you go to pay, you’re prompted with,“Do you have one of our store credit cards? If you sign up for one, today, I can give you 25% off your purchase, and you will save BIG.”

You look at your final order price and 25% off sounds really good, so you say, “What the heck?” and sign up. But what’s not mentioned is that the worse your credit, the more likely you are to receive a card with a high interest rate (APR). Therefore, this discount is really only worth it when you use it to build credit, but avoid late fees and interest charges.

About store credit cards

Store credit cards are offered by retailers and typically only allow you to make purchases from that store. However, some are part of a larger payment network such as Visa or Mastercard, and most report your card history to the major credit bureaus.

Applying for a store credit card requires the issuer to examine your credit report, which is often called a hard inquiry. While store cards are often easier to get than regular credit cards, if you have bad credit or no credit, you could still be denied.

Compared to other credit cards, store cards tend to have no annual fee, but higher than average interest rates. They can also have somewhat higher fees for things like late payments and returned payments.

Remember, you never have to worry about high interest rates if you pay your entire balance off before your payment due date.

In general, before signing up for any credit card account, make sure you understand the fee structure first.

For some, a retail credit card is a great way to build credit, but it doesn’t work for everyone. When you have bad credit, you may not qualify for a store credit card. And even when you do qualify, you shouldn’t use a store credit card if having one encourages you to incur debt.

The upside of a store credit card

The good thing about store credit cards is that you don’t have to have excellent credit to be approved for one, which can make them a good place to look when you’re establishing credit for the first time, or when your credit is just fair or good.

For example, you can often qualify for a store credit card if you have just a limited credit history, often called a thin fine. Here are some of the best store credit cards.

Many people use retail credit cards to establish credit for the first time. Lindsay Engle, an entrepreneur and founder of Eternally Beautiful Women, a skincare line, says she uses three store cards and got them very early on.

“They were among my very first credit cards. Store credit cards are an excellent way of starting to build great credit,” says Engle.

However, you should be wary of retail credit cards. If you’re going to use one to establish credit or improve your credit then the card must abide by the following two rules.

Rule #1: Make sure the card has autopay

Most retail credit cards have an autopay feature that allows user to set up recurring payments, so that they are never late on credit card payments. However, some retail credit cards don’t have an autopay feature.

Your retail store credit card must have an auto pay feature on it to ensure that you never make a late payment.

In addition, to making sure a late payment doesn’t incur fees and hurt your credit, the autopay feature can make sure that you always avoid interest charges by paying your balance in full.

Stephanie Heacox, founder and CEO of Sharegenarians, an online housemate service specifically for older adults, says that she will only use a store credit card if she can set up auto-pay, “so that I will never get charged interest.”

So before you go rushing off to get a store credit card from one of your favorite places, make sure that it has autopay.

Rule #2: Choose a store card that’s not accepted everywhere

The second rule that is a must when considering a retail credit card is to make sure that it’s not accepted everywhere.

Yep, you read that correctly.

The biggest problem with credit cards is people going into debt over them, because they use them on everything from birthday cakes to gas to lottery tickets.

As a first time credit card user who is using a retail credit card to establish credit for the first time, it’s important that you have boundaries.

Engle says she likes retail credit cards because the cards she has could only be used at their designated store.

“That way I can’t over use them. Regular cards I tend to abuse far more than store brand credit cards,” she said.

Remember, retail credit cards should only be used by specific people for specific purposes.

Don't get a store card for the wrong reasons

Remember the example of a hypothetical shopper looking at their order and thinking about how 25% off sounded much better than the normal price. If you're applying for a store credit card just for the savings, then you're doing it for the wrong reason.

Pat Huegel, CEO of KNTY Design, a bracelet line, doesn’t understand why someone would sign up for a store credit card.

“Saving $5 in exchange for opening a whole new line of credit?” says Huegel on why it's not worth it to him.

Ariana Arghandewal of Pointchaser, a travel rewards guide website, agrees with Huegel that they can be useless if you're using it for the wrong reasons.

“Aside from an initially decent discount (i.e. upwards of 20% at Macys), they’re pretty useless and not very rewarding. Many of these cards carry high-interest fees and offer low credit limits, which isn’t ideal if you want to increase your credit score,” says Arianna. She believes that Travel Rewards card are much more beneficial.

If you are working to establish your credit history for the first time, then you can use a retail store credit card to do so, but only if you’re using it to solely establish. Once you can qualify for a secured or unsecured credit card, try to only use your store card every once in a while to keep the card from lying dormant.

Alternatives to a store credit card

While store credit cards are one way to start building your credit, if you either can’t get approved for one, or are nervous about taking on the risks associated with them, remember you have other options to build good credit.

In general, the way to start building credit is to open a credit account and build a history of monthly payments with the credit bureaus.

One possible option is to get a secured credit card. A secured card works exactly like other credit cards except they usually require an upfront security deposit of at least a few hundred dollars that sets your credit limit.

As long as you make your payments and don’t accrue fees, this deposit is refundable if you decide to close your account.

Unlike other credit cards, secured cards usually have lower credit limits, making them (comparatively speaking at least) a bit lower risk than some other credit cards with higher spending limits.

Many of the major credit card companies also offer a secured card, as well as some banks, other lenders, and now Self. You can also check with your local credit union to see if they have an offer too. While some secured credit cards require a good credit score to get, most are designed for people with no credit or bad credit – at least to a certain degree.

If you just aren’t ready for a credit card yet, but need to build credit, you can always get a credit builder loan instead. Credit builder loans, like the ones offered by Self, usually have the lowest barrier of entry, since they don’t require a hard credit check or a large, upfront deposit.

One important thing to note about these loans, though, is that you don’t get the money until the end, since the purpose of these loans is usually just to build credit.

These options allow you to build credit even if you’ve had serious credit problems in the past. And by combining two or more of these methods, you could add more positive information to your credit history and build your credit more quickly.

Bottom line

A store credit card can be a risky way to build credit, but if you follow our rules and are aware of the risk, you should be able to avoid the pitfalls.

About the author

Jason Steele has been writing about credit cards and personal finance since 2008, poring through the terms and conditions of credit card agreements to understand the minutiae of how these products work. His work has appeared on Yahoo, MSN, HuffingtonPost and other major news outlets. In his free time, Jason’s a commercial pilot. He graduated from the University of Delaware with a degree in History.

Written on October 29, 2019

Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

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