Store credit cards may seem like a small issue in the big world of credit cards and debt, but unfortunately these ubiquitous cards are often the cause of major credit trouble. Thanks to exorbitant interest rates and an easy application process, these store credit cards can do major damage to unwary consumers' credit scores. But it is possible to avoid high charges and lengthy repayments, and even beat the stores at their own game. Read on for a look at store credit cards and what to watch out for when using this often-overlooked form of credit.
TUTORIAL: Credit Cards: Introduction
What Is a Store Card?
A store card is simply a credit card that can only be used in a specific store or store group. Do not confuse store cards with loyalty cards, which are cards that allow you to collect points when you spend in a particular store. Unlike loyalty cards, store cards allow you to borrow money. Make no mistake, if you are not careful store cards can mean only one thing - high interest debt. (Stores are set up to make products appealing in order to persuade shoppers to buy more. For more, see Should You Pay In Cash?)
What Is the Problem with Store Cards?
In a nutshell, these cards are incredibly easy to obtain, and they entice customers with the promise of great deals and discounts. In reality however, many people sign up and end up paying horrendous rates of interest on the purchases they have made. James Daley, editor of Which? Money said of store cards, "While the interest rates are unnecessarily high, the real problem is the accessibility of store cards. You can sign up for a store card at the checkout, and start spending there and then."
The majority of department store cards on the market charge over 25% interest - some are nearly 30%. This is a huge amount, much more than a standard (never mind a competitive) credit card.
Credit History Problems
A big problem with these cards is that retailers don't always check your credit rating before issuing your card. Although this sounds great in theory, they're actually allowing those who don't have the available funds to get into debt they cannot afford without explaining the consequences.
When you apply for a store card, a search is added to your credit file. If you apply for a lot in a short space of time, your credit score will drop significantly, making it harder for you to get credit in the near future. (For more, see How Credit Cards Affect Your Credit Rating.)
Available to Those with Low Incomes
For many people, this is the only credit card available to them. The store assistants are untrained in financial education, and are simply told to sign people up in return for cash incentives. Thus, those without suitable disposable incomes often find themselves spending on these cards without understanding how to manage them, racking up expensive, ill-afforded debts in the process.
Encourage Unsavvy Loyalty
The irony of store cards is that they guarantee the store that we will spend our money only in their shops, yet they charge us more than even a credit card to do it! We should always shop around, and only be loyal to a specific store if the product is the best value.
Can We Beat Them at Their Own Game?
The number one rule is not to go anywhere near store cards unless you are absolutely certain that you will pay the balance off in full each month. And never be seduced into buying something just for the sake of getting a discount. If you are confident you can do this, then you may be able to take advantage of store card perks. (For more see, Credit Card Perks You Never Knew You Had.)
Grab the Initial Discount Offers
Many store cards offer a discount for signing up - such as 20% off the first time you spend on it. Don't simply blow this on a small purchase. Sit tight until there's something in that store that you need to buy that's that bit more expensive, thus maximizing the discount.
Enjoy the Membership Benefits
If there are exclusive cardholder events and offers, you can keep hold of the card to secure an invitation. Many store cards have special "store card holder" evenings and offers, a bit like a membership club. There's nothing wrong with keeping a store card just for this.
Avoid the Traps
Store cards do not pose a problem if you pay off the balance within the interest-free period. If you do have a balance sitting on a store card, then consider switching to a 0% balance transfer credit card, which will allow you to make inroads into the money owed and eliminate interest charges. Never use store cards for borrowing money long-term. If you do, debt problems can soon mount up, and the original discounts and item prices will be small fry to the interest payments you could find yourself making.