When Mykail James was 19 and working a vacation job at Victoria’s Secret, he took out a store credit card with a $2,000 credit line.
When his school leave was over, he realized he could no longer afford the payments. After missing a few, he paid off the card only to find that his credit score had dropped significantly, which affected his ability to access other types of credit.
“I didn’t get a real bank credit card until I was 21, just because of that fear,” says James, now a financial expert and founder of Boujie Budgeter. “Because of the way it affected my credit and made it difficult for me to buy a car a few months later.”
With the holiday shopping season just around the corner, experts recommend being careful when your favorite store offers you a credit card.
“When you’re offered at the checkout counter, most of the time it makes sense to say no,” said Ted Rossman, senior industry analyst at Bankrate.
According to the Federal Reserve, outstanding credit card balances will reach $1.14 trillion as of August 2024, meaning that credit card debt is increasingly a concern for millions of Americans. Bankrate found that the average store credit card has an average annual percentage rate of 30.45%, which is higher than the average APR of 20.78% for all credit cards. The APR is how much interest you’ll be charged if you can’t pay your balance in full each month.
Here are recommendations from the experts when considering a store credit card:
Don’t be too quick to say yes to a store credit card
Store credit cards are usually offered at checkout, and they provide shoppers with a line of credit that encourages spending more on store products. If not managed properly, these credit cards can have a negative impact on your credit history.
When offered a store credit card, Bruce McClary of the National Foundation for Credit Counseling recommends not accepting it too quickly.
“Ask for something with all the written information that you can take with you and review later,” McClary said.
Often times, store credit cards are bundled with a promotion such as 0% annual interest or a discount on your purchase. And while this may sound appealing, it’s best not to rush into a decision while you’re at the counter.
Understand the details of the agreement
Before signing up for a store credit card, you should read the fine print, Rossman said, including how much interest will be charged if the cards aren’t paid in full and any late or penalty fees.
“A lot of times, these commercial cards charge very high interest rates,” Rossman said.
Another thing to look out for is “deferred interest,” which is when credit cards offer a promotion like 0% for 12 months but, if the customer doesn’t pay in full when the promotion expires, they are charged all the interest that accrued during that time.
Do your research
If you’re looking to get a store credit card, McClary recommends doing some research on the merchant. Looking for reviews online can help you identify if others have had complaints about their store credit cards.
Additionally, McClary recommends asking yourself these questions:
— How often do you shop at the store?
— Will you use the card enough to benefit from the rewards and discounts that come with it?
— Can you use another type of credit card?
— Can you pay off the card in full at the end of the month?
— How many credit cards do you have? Is it worth adding another line of credit?
These questions will help you decide if a store credit card is right for you or if you might be better off with a different type of credit card.
Best practices if you have a store credit card
If you decide a store credit card is a good option, it’s important to pay your card off in full each month, McClary says. It’s also a good practice to only use what you can afford in one payment cycle, even if your credit line is high.
“You want to keep yourself out of this uncontrollable cycle of debt,” McClary said.
A tip for building healthy habits is to set some limits when using your store credit card, says James. For example, using your store credit card only for purchases over $50. That way you can reduce the amount of money you spend on your credit card and it becomes easier to track your expenses.
Maintain credit cards as a way to build credit history
Store credit cards have been known as a tool to build your credit history if you have never had a credit card before. This is because commercial credit cards have fewer requirements to get approved. However, in recent years there has been an influx of other credit cards that offer help to people to build their credit history, McClary said.
If you’re looking to build your credit score, McClary recommends considering secured credit cards. These cards are considered secure because the lender usually asks for a deposit and the credit line is lower than other credit cards. Once you use secured credit cards and build your credit report, you can graduate to a regular credit card.
Save credit cards vs. Buy Now, Pay Later
Ever since Buy Now, Pay Later services became available, stores have been offering it to customers and store credit cards. It is important to understand the difference.
Store credit cards work like traditional credit cards. By filling out an application, you’re asking a soft question on your credit report and if you decide to get a credit card, this line of credit will show up on your credit score. Buy Now, Pay Later Services do not show up on your credit report and are usually tied to a specific purchase and are not a revolving line of credit.
“Companies like Affirm, Afterpay, and Klarna have been entering the store credit card market because they fill the same type of niche,” Rossman said.
Both with store credit cards and BNPL services, customers should proceed with caution to avoid getting caught in overspending that could lead to huge debts, he added.
—By Adriana Morga, The Associated Press
The Associated Press receives support from the Charles Schwab Foundation for educational and explanatory reporting to promote financial literacy. The independent foundation is different from Charles Schwab and Co. Inc. The AP is solely responsible for its own journalism.
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