7 Drawbacks of Retail Store Credit Cards

Why store credit cards aren't the best

Store credit cards are everywhere. You've probably been offered one on at least one of your shopping trips in exchange for a 10%-15% discount on your purchase. The money savings may sound enticing, especially for a credit card from with your favorite retail store, but store credit cards aren't as great as they seem.

There may be some perks with a particular store card which are tempting-occasional discounts and rewards points. However, in the grand scheme of your credit history, the drawbacks of store credit cards generally aren't worth the short-term savings.

Retail Credit Cards Usually Have Low Limits

A woman holds multiple credit cards in her hand
© Peter Muller / Cultura / Getty

Store credit cards typically start you out with a very low credit limit—somewhere between $100 to $500, especially if you have poor credit. A low credit limit can Your purchases could easily put you at a higher credit utilization–the ratio of a credit card balance to the credit card limit–than what is beneficial for your credit.

Any credit utilization over 30% is too high and will negatively impact your credit score. On a credit card with a $100 credit limit, that means you should never charge more than $30. In many stores, that’s barely a t-shirt.

They Have High Interest Rates

Retail store credit cards nearly always have high interest rates. APRs between 20% and 30% are common—the current average is 24.24%—which makes carrying a balance very expensive. If you don’t plan to pay your balance before the end of the grace period, you’ll face some hefty interest charges.

Interest costs would completely negate the discount you received on your initial purchase if it takes you several month to pay off your balance.

Major Credit Cards Are Better for Your Credit Score

Traditional credit cards are better for your overall credit history. You may need to start with a store credit card if you have a limited or damaged credit history, but aim to graduation to a major credit card as soon as you can. You'll be able to use the credit card in more places and you won't have the drawbacks of a store credit card.

Usage Is Limited

Most retail credit cards can only be used in that particular store. If your tire blows out and you need to pay for towing, your store credit card won’t help you. When you need to book plane tickets for your summer vacation, your store credit card is useless.

There are a handful of cards, like the GAP card, that can be used in a family of stores, but usage is still very limited.

The exception is when you're approved for a co-branded sore credit card, which also carries an American Express, Mastercard, or Visa logo. Be careful, some retailers don't allow you to choose whether to apply for the co-branded or regular store credit card.

Retail Credit Cards Encourage High Utilization

Store credit cards can negatively influence your credit score. Just the act of applying for the credit card can put a small dent in your credit score. That’s because credit inquiries made when you apply for credit make up 10% of your credit score. Because store credit cards encourage high utilization, your credit score will drop as your balance gets closer to your credit limit.

They Encourage Debt

There is more temptation to spend when you have a retail credit card. You will frequently be offered incentives for spending, like discounts for cardholders, emails about sales, and even rewards on your spending. Many retail credit cards will continually raise your credit limit as you increase your spending on your credit card.

If you’re not disciplined with your credit card charges, you could easily find yourself with an uncontrollable balance. Follow the rules of charging only what you can afford and of keeping your balance below 30 percent of the credit limit, no matter how high your credit limit rises.

The Terms Aren't Spelled out at Signup

Generally, when you apply for a retail credit card at the point of sale, you aren't given a full explanation of the terms and conditions before you apply. Even if you are given a brochure with the credit card terms, you don't really have enough time to examine the costs and compare them to other credit cards to be sure you're getting a good deal.

Think about any major financial decision, especially opening a new account. With retail credit cards, you're not always given that opportunity.