Are Store Credit Cards Good or Bad?
- Of all types of credit cards, store cards usually have the highest annual percent yield -- usually 21 to 33 percent, according to the BCS Alliance. Also, the limits on these cards are typically far lower than that of a traditional credit card. This makes maxing out the credit limit and paying much more for purchases if you carry a balance much more likely.
- The minimum requirements to obtain a credit line from a department store are much lighter than those of a bank. Most stores approve anyone who makes more $12,000, is at least 18 years of age and has a checking account. This makes store cards ideal for someone building a new credit history or rebuilding a bad one, because most store card creditors report to the major U.S. credit reporting bureaus.
- The low limit and fees that most department stores charge could damage your credit score as soon as the lender approves the application, because the fee might eat up a large portion of the card's limit. Credit utilization -- the ratio of credit used to credit available -- is a significant part of the FICO score calculation. If you receive a $500 limit with a $250 annual fee, you start off with a utilization of 50 percent -- dangerously high in most cases.
- Never carry a balance on the card from month to month, especially if you just sign up for the promotional discount. At the interest rates charged by most department stores, a month or two of finance charges can cost much more than whatever discount the company offers. Ask the creditor if he reports to Equifax, Experian and TransUnion -- these are the major U.S. credit bureaus. Unless he reports to all three, a store card does not build your credit history as much as possible.
