Should you get a store credit card?

Black Friday is upon us, and retailers are ready not just to sell, but to lend.

That is, they’re ready to talk you into getting their proprietary credit cards. When you shop in-store, you’ll almost certainly get asked when you pay for your purchases. If you’re shopping online, a pop-up ad will probably follow you all the way to the “pay now” button.

The introductory offers may sound tempting. (Zero interest! Deferred interest! 30% off your first purchase!) But is a store credit card the best choice for you right now, or ever?

That depends. Store credit cards may have their place, especially for those trying to build or re-build credit, but they aren’t always a good idea.

Here’s what you need to know before applying for retail credit.

They have higher interest rates

Howard Dvorkin, chairman of Debt.com, points out that the annual percentage rate for retail credit cards is now 28.93% on average. Some retailers go higher; for example, Michael’s and Burlington charge an APR of 33.24% on their store cards.

By comparison, the average rate for all credit cards is 21.19%. Some difference, huh? 

Promotions can be tricky

That 30% off your first purchase sounds great. But will you shop at the store often enough to justify getting a card there?

As for those deferred or zero-interest promotions, both can be problematic. “Zero interest” means the retailer won’t add any interest to your store credit card balance during a specific promotional period. But do you have a plan in place to pay it off before then? If not, you could pay a scary amount of interest. Those cards have higher average APRs, remember?

“Deferred interest” means that no interest will be charged if the card balance is paid in full before a certain time. Miss the deadline, even by a day, and you’re on the hook for interest retroactive to the date of the purchase.

Used correctly, though, promotions use can “be part of a smart strategy to save money on large purchases like home appliances, furniture or a new computer,” according to Dvorkin.

A store credit card is “closed-loop”

A closed-loop card can be used only at the retailer. That severely limits your ability to get the best deals when buying things you need or gifts for others.

If it’s a place you shop at a lot, then store credit card incentives might work in your favor. For example, if a card offers rewards like “store cash” and you shop there often, pairing store cash with sale prices means substantial savings.

“Using a store card is about making some very deliberate decisions and using them to your advantage,” says Rod Griffin, senior director of consumer education for Experian.

A store credit card can be a good start

Suppose your credit is trash due to unemployment, divorce, identity theft or, yes, poor money skills. A low score means it’s tough to get a credit card with a reasonable interest rate and few fees. In that case, a retail card could be an excellent first step.

You should also consider a secured credit card, which requires depositing cash to the lender. According to credit expert Beverly Harzog, a secured card is good for everyday essentials (groceries, gas), and responsible use will help boost your credit score.

Can’t get a good deal on a secured card, even at your local credit union? Then go ahead and get the store credit card. Depending on the retailer, you could qualify even with a credit score in the 500s. Your credit limit likely won’t be high (more on that below), but the card can put you on the road to a better score.

“You need to get started somewhere. If you do it wisely, it can be a great tool,” says Harzog, credit card expert for U.S. News & World Report and author of five personal finance books.

Watch out for over-use syndrome

You might tell yourself you’re “building credit” by shopping with the store credit card. Technically, that’s true. But it’s a dangerous attitude for several reasons.

Doing all your personal and gift shopping in one place means you can’t look for better deals elsewhere. Sure, you’re building credit – but you might be spending more than you must.

It’s easy to blow through your “credit utilization ratio,” or the amount of available credit used at any given time. That should never be more than 30% and, ideally, no more than 10%. If the limit on your store credit card is $300, that means you could spend no more than $30 to $90 a month.

Overspend at your peril: The credit utilization ratio makes up 30% of your FICO score.

Finally, a credit card can make it harder to stick to a budget. Would you be as likely to overspend if you had to pull $90 out of your wallet? Maybe not. But plastic makes it easier to think, “Heck, it’s Christmas! I’ll pay it all off by February!”

Will you, though? Almost one-third (31%) of consumers interviewed for NerdWallet’s 2022 Holiday Shopping Report were still paying off holiday bills nine months later.

“You need to be conscious of how you’re using the card, and how you’re going to repay it,” Griffin says.

But you do need to use the card

Having a card appear on your credit report doesn’t magically improve your score. The impact comes from regular use and on-time, in-full payment. Carrying a balance will not improve your score.

You know what does improve your score? On-time payment, which represents 35% of your FICO score.

It began with a store credit card…

Smart use of a store credit card should lead to your receiving offers for additional credit cards. Yay! But again, be careful. Don’t accept the first offer; instead, do a little research for your best options. Look for zero fees and, if possible, some rewards.

Pro tip: Don’t apply willy-nilly. Each time you put in an application, the lender will do a “hard pull,” i.e., contact the major credit bureaus (Equifax, Experian, TransUnion) to get a copy of your report. Each pull will take about five points off your score.

That number will rebound in a year or less, but the inquiries stick around for up to two years. This could lead potential lenders to wonder why you asked for so many lines of credit in such a short time. It’s not a good look.

Correcting your course

Improving your score and getting a couple of credit cards could mean you’re on the way to lower interest rates on loans, or being able to get loans at all. That’s only part of the picture, though. Unless you fix the issues that got you into trouble in the first place, you could very well end up back in the hole.

Some factors, such as illness or layoff, are mostly out of our control. We can help stave off their impacts, though, by doing a financial fire drill and building an emergency fund.

Or maybe your credit is poor because you have a “thin file,” i.e., nothing on your credit history because you always insisted on paying with cash or never established credit in your own name before divorce. Again: Not much to do about that, but there’s nowhere to go but up.

Other reasons are potentially more fixable. No one ever taught you how to budget? The National Foundation for Credit Counseling has a lot of info on its website, and can also help you find counseling on a sliding-scale basis. The counselors who work with the NFCC must agree never to turn anyone away for inability to afford help.

Maybe you have a shopping problem. If so, a group like Debtors Anonymous or Spenders Anonymous might be able to help. If your insurance covers mental health counseling, a therapist might be able to help you get control of your cash.

A therapist or credit counselor can also help with issues/attitudes like:

• “Family always helps family.” (But what if this leaves the helpers indebted?)
• “My kids are going to their dream schools – I don’t care how much it costs!” (Now you have parent loans to repay and may also have to support grads whose loan payments mean they can’t afford housing.)
• “We’re always going to have debt, so why not enjoy ourselves a little? There’s no pockets on a shroud!” (Understandable, but also unsustainable.)

Moving away from these ingrained money beliefs can be tough, which is why counseling might be necessary.

The bottom line

A store credit card might be the right choice if you shop there a lot and anticipate doing so in the future. It can also be one way to improve your credit score. But don’t get the card just because you want to save 20% that day. Have a plan for which card would best support your money goals overall.

Readers: Do you have a store credit card? Got any best-practice tips?