Store credit cards: the good, the bad and the ugly

Getting an automatic discount or deferred interest by applying (and being approved for) a store credit card often sounds like a great deal, and it can be - for those who can afford to pay off the balance each month. Less financially-responsible customers should beware proceed with caution, though. A store credit card balance can grow quickly, leaving you paying double or more for the item you purchased.

Does a store card make sense for you? Here's a look at the good, the bad and the ugly of these cards:

The good
The obvious advantage of signing up for a store credit card is the immediate discount that most stores offer on the first purchase. If you're buying a barbecue grill or new bedroom set, you'll be pleased to save 10 per cent in exchange for signing up for a new credit card. In addition to the immediate savings, store cards offer perks such as special coupons or no interest for a number of months.good-bad-ugly-store-card

Store cards also are easier to obtain than regular credit cards. The reason for this is twofold. First, no store wants to alienate its shoppers by refusing credit. Stores set the bar low for store card approval to put cards in the hands of more shoppers, Monica Eaton-Cardone, co-founder of eConsumer Services, a company that resolves transaction disputes between merchants and cardholders, said in an email.

Second, since the card is valid only at that store, the potential loss to the company is limited. Store cards also have lower limits than traditional credit cards, which minimizes any monetary loss for the store.

If you have poor or mediocre credit, store cards are a way to gain access to credit or to repair damaged credit. Because retailers report store card usage to the credit bureaus, Experian and TransUnion, positive financial habits are recorded on your credit reports.

The bad
Of course, for shopaholics, the low credit limits on store cards could be seen as a negative! In all seriousness, the low limits can negatively impact your credit score by raising your credit utilization ratio, which is the amount of credit you use compared to how much you have available. You should aim to keep this number as low as possible, and try not to use more than about 30 per cent of your credit. Your credit utilization ratio makes up a significant chunk of your credit score, so it's important to keep this ratio low.

With low credit limits, it can be difficult to keep store card's credit utilization ratio below 30 per cent.

Because store cards can be used only at specific stores is a downside. If you're trying to use the store card to build up your credit score to obtain a regular credit card, you may have a hard time doing so if you can use the card in one place. You might find yourself applying for multiple store cards, which will result in multiple "hard pulls" on your credit score, which can further damage your credit.

Finally, having more store cards means more bills to pay and a greater chance of missing a payment.

The ugly
Missing a payment on a store card reveals the ugly side of these cards. Store cards have a higher interest rate than traditional credit cards, and these cards are also subject to late fees, penalties and sometimes annual fees.

Eaton-Cardone said it is especially important to use a store card responsibly because of the higher interest rates. In Canada, Home Depot and The Brick have interest rates of 28.8 per cent and 29.9 per cent respectively. In contrast, many regular credit cards in Canada have a purchase rate of about 19 per cent or lower.

The Brick, Best Buy and Rona also charge administration fees, which increase based on the amount financed. These fees are due at purchase or are subject to interest charges. Customers seeing a promotion of "24 months interest-free" might be surprised to find interest accruing if they haven't read the small print or haven't made the minimum payment.

Finally, as with traditional credit cards, missing a payment means having to pay interest all the way back to the purchase date. For store cards that offer deferred payment plans (no payment for 12 months, for example), missing a payment means triggering 12 months of interest charges.

Should you apply?
The only way to determine if applying for a store card is a good idea is to know your own financial habits. Take a look at your budget: if you purchase a $400 barbecue grill, can you pay it off within the card's interest-free period, or, if there is no such period, can you pay it off in a reasonable amount of time? Be honest with yourself about your spending and repaying habits.

If you have doubts about whether you can control your spending with a store card, you're probably better off with a secured card, if you don't qualify for a regular credit card. While store cards have a good side, their bad and ugly sides are far more expensive than the card perks are worth.

See related: Beware ‘buy now, pay later' ads; Secured credit cards won't shut you out from rewards

Published August 2, 2016

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