Shoppers are constantly being offered retail store cards with special promotion rates. While it may seem tempting at the time to open up a store card for an additional 10% off today’s purchase, in the long run it is often not worth it. The cards tend to have some store-specific benefits and perks but otherwise they are generally harmful to one’s credit. This is especially true if you miss even one payment which means a loss of the promotional rate as well as the promotional financing.
To begin with, retail store cards generally have a brief grace period such as “0% interest for 6 months” but once that time is over the interest rates tend to be exorbitantly high. They are generally at least 20% to 20% which is substantially higher than a traditional credit card. This means that if you spend $100 at a store but do not make any payments during the grace period, that balance will become $120 immediately after 6 months. As you can imagine, it will increase exponentially after that.
Another downside of this scenario is that it encourages debt. This is because a store credit card makes it easy for people to charge high amounts and the issuer will almost always raise the credit limit on a store card even without request. This encourages you to spend more than your means while at the store without thinking about the high interest rates that will eventually lead to you owing substantially more than you spent in the first place. It can quickly turn into a vicious cycle of payments.
Maintaining a good credit rating is vitally important and this particular scenario can detrimentally effect a credit score. Even applying for the card will influence a credit score. However, missing a payment or waiting until the promotional rate has passed can begin to greatly lower even a good credit score. This is because as the charges on the store card get closer to the limit, the balance and use increases which lowers a credit score. It is not worth it to have a retail store card negatively change your credit score.
In addition, credit utilization rates are effected by retail store cards greatly and missing a payment can make this number go up even higher. For ideal credit, one should never carry a balance of more than 20% the store card. This means that if a store card provides a credit limit of $1000, you should never carry a balance of $200 or more. Unfortunately, when it comes to retail store cards most people have higher balances than 20% which makes their credit utilization rate look bad and in turn harms the credit score further.
In conclusion, opening a store card at a retail storefront or online merchant may seem appealing at the time. However, missing even one payment or waiting until the promotional rate is over can have detrimental effects on credit scores, credit utilization rates, and bank accounts. It encourages debt and may lead to long term financial struggles as the interest rates continues to make it difficult to make payments.