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. Nevertheless, it is possible to avoid high charges and lengthy repayments. Here’s what to watch out for when using this often-overlooked form of credit.
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. After all, stores are set up to make products appealing in order to persuade shoppers to buy more.
The Pros and Cons of Store Credit Cards
Store cards are incredibly easy to obtain, and they entice customers with the promise of great deals and discounts. In reality, however, many people end up paying usurious rates of interest on the purchases they have made. James Daley, former editor of the British website, Which? Money, and currently managing director of Fairer Finance, 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."
What's more, the majority of department store cards on the market charge over 25% interest, and some charge nearly 30%. This is an exorbitant amount, much more than a standard (never mind a competitive) credit card.
Reports to credit bureaus
Easier to get than full service credit cards
Discounts, loyalty points and early sale access for cardmembers
Very high interest rates
Limited credit lines
Getting In Over Your Head
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 spelling out the consequences.
When you apply for a store card, a search is added to your credit file. If you apply for a lot of them 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 some people this is the only credit card available to them. The store assistants are untrained in financial education and 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 and racking up expensive, ill-afforded debts in the process.
The irony of store cards is that they guarantee that we will spend our money only in that store's branches, yet the company charges us more than even a credit card to do it! You should always shop around. 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 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 both of these things, you may be able to take advantage of store card perks.
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 expensive in the store that you need to buy, thus maximizing the discount.
If there are exclusive cardholder events and offers, you can keep the card to secure an invitation. Many store cards have special evenings and offers, a bit like a membership club. There’s nothing wrong with keeping a store card just for this.
The Bottom Line
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 it 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 compared to the interest payments you could find yourself making.