How Do Store Credit Cards Affect Your Credit Score?

Anyone who’s made a purchase from a large retail chain knows the drill: you go to the checkout and receive a sales pitch from the salesperson to sign up for the store’s credit card.

These store cards can seem like an easy way to save a few bucks – you’ll have access to regular coupons, annual discounts, and big savings on your current in-store purchase. But they can also have a big impact on your credit. Before signing up, determine if you’ll get any long-term benefits beyond the momentary short-term savings, and make sure you understand the consequences a store card can have on your finances.

Here’s what you need to know about store credit cards to make a more informed decision in the payment line:

How do storage cards work?

Store cards, or retail cards, are a type of credit card that you can only use with one store or family of stores. Usually, you can use them both in-store and online to purchase merchandise like you would with a traditional credit card, while still enjoying discounts or perks that you wouldn’t otherwise have access to.

The Kohl’s credit card is a good example. It’s a charge card, so you can only use it for purchases at Kohl’s stores or on Kohls.com, and its main benefits are special sales and frequent promotions for cardholders like discounts. ranging from 15 to 30%.

Kohl’s credit card doesn’t charge an annual fee, but it does have a variable APR at 25.99%. This is common among store cards, although their features can and do vary depending on the retailer offering them.

Are store cards the same as regular credit cards?

What you probably think of when you imagine a store card is a closed loop retail card. This is a credit card that you can only use to make purchases from the merchant you open it with, like the Kohl’s credit card above or the Lowe’s Advantage card.

There are also other factors that differentiate store cards from traditional credit cards. For starters, it’s usually much easier to qualify for retail store cards, says credit expert John Ulzheimer, who previously worked for FICO and Equifax.

This is usually due to the supply of risky credit cards, says Ulzheimer. These terms can include astronomically high APRs and very low credit limits, sometimes as low as a few hundred dollars. “Subprime terms mean a higher approval rate because the lender can deepen the pool of credit quality,” he says.

That’s why it can be easier to get approval for a store card than a general credit card, even if you have a limited credit history or no credit history.

Today there are retail co-branded credit cards that look more like regular credit cards and generally have more stringent credit requirements, such as the Visa Signature Amazon Prime Rewards card, which is issued by Chase. While these open loop cards provide an added incentive in the store they’re associated with, you can use them anywhere credit cards are accepted.

Some merchants even offer both types of cards, like Target’s Target REDcard ™, issued by TD Bank. You may be considered for the Target closed-loop credit card instead of the Target open-loop Mastercard, depending on your creditworthiness and other factors (Target specifies that the Mastercard may not be available to new applicants).

How Do Store Cards Affect Your Credit Score?

One of the main benefits of store cards – and the reason they’re popular as the first credit card – is to create credit. Your credit balances and payments are reported to the three credit bureaus, which (if you use your card responsibly) can help you build your credit and improve your credit score over time.

Store cards can help your credit in other ways as well, including adding to your credit mix, says Eric Ellman, senior vice president of public policy and legal affairs at the Consumer Data Industry Association. If you only have one car loan on your credit report, for example, adding a credit card (including bank cards) can help show future lenders that you can juggle multiple types of loans. ready.

“It’s generally a good thing to show lenders and creditors that you can handle different types of credit accounts responsibly,” says Ellman.

Applying for a store card will also result in a thorough investigation of your credit report, just as if you had applied for a traditional credit card. It’s pretty standard and there’s nothing to worry about in the long run, but too many difficult inquiries in a short period of time can negatively impact your credit.

Is it better to get a store card or a regular credit card?

There are situations where a store card can be beneficial, or even one of the few options available to consumers.

Ellman says store cards can be ideal for “young and newbie” people, as well as “new residents of the United States with no credit history.” If you’ve struggled to get traditional credit card approval from major issuers in the past, a retail card can be a good entry point into the market, he says.

Store cards can also be useful if they match your shopping habits. If you’ve got a big upcoming purchase, like a kitchen appliance or TV, a store card discount can save you big money. And for those retailers you already frequent and would spend money with anyway, store cards can provide great ongoing value and special benefits.

But these cards are not very versatile. You’ll only get savings on products you buy from the store card retailer, and a closed-loop card won’t help if you have a surprise medical bill or auto repair.

For most people, a general cash back credit card will offer more flexible savings on everyday purchases. For example, you can earn 2% cashback on everything (1% when you buy, another 1% when you pay) with the Citi Double Cash Card. If you really think a store card will add value to your spending, consider pairing it with a more flexible card for your other budget items.

Final result

Whenever you decide to open a new credit card, remember that borrowing money always comes with risk. It’s true whether you ask for a regular rewards card or a store card that only works with a specific retailer.

“Consumers need to be careful about their spending habits,” says Ellman. Retail cards often come with higher interest rates, which can make anything you buy much more expensive if you don’t pay your balance in full each month. If you use a store card to rack up debt you can’t afford to pay off, any savings on your original purchase will be quickly wiped out.

Think about how a store card could affect your spending in the long run, rather than falling into a selling point at the cash register. “It’s important that consumers don’t make impulsive decisions and instead review the fine print – the benefits, rewards, obligations and fees – before opening an account,” says Ellman.

If you open a store card, use it when you qualify for discounts on purchases you intended to make anyway. Always pay your balances in full and on time, and keep your balance well below your credit limit to maintain good credit. Fortunately, many store cards don’t charge an annual fee, so you can keep your card open at no cost and only use it when you want to take advantage of savings.