There are over a billion credit cards in the U.S., but they are not all made equal. Some credit cards come with high fees and high rewards—and others come with low fees and less encouraging benefits.
But one type of credit card that consumers should be wary of is in-store credit cards, or specifically branded credit cards designed to inspire brand loyalty.
In-store credit cards can come with advantages, too—including high rewards for in-store purchases that are designed to keep customers shopping. Are these benefits worth the downsides?
Here are five reasons some customers should be wary of in-store credit cards.
You Have to Keep an Eye on Your Credit Score
Opening an in-store credit card will have the usual short-term hit on your credit score, as it’s considered new credit and because it will lower the average age of your accounts. That’s to be expected when opening any credit card. But is there something about in-store credit cards that might also damage your credit in a singular way?
You’ll want to make sure the card’s limit is high enough for the purchases you’re planning. When you put a lot of purchases on a card and get closer to your credit limit, your credit utilization ratio will increase. This has a negative effect on your credit. Therefore, putting a lot of purchases on an in-store credit card with a low limit may lead to a lower credit score. You may end up looking riskier to any future lenders.
Limited Use: A Deal-Breaker?
Perhaps the most obvious and most pronounced of these drawbacks: the limited use of a credit card. While some in-store credit cards allow you to shop anywhere, others are more limited in scope. While it might seem like a great idea to finance new home purchases with your store-branded card, it leaves consumers with few options once the bills have been paid and the need for the card itself has gone away.
A broad credit card with cash back and travel rewards might be a better option for those who want to keep their wallets simple. Using a high-limit credit card for a range of purchases can funnel just about any purchase into these rewards, which in turn gives the consumers more options and freedom with their purchases.
Interest Rates: Will They Come Back to Bite You?
Some stores are smart enough to entice customers with a 0% APR—or at least a brief period in which the card charges 0% interest. But this upfront benefit can sometimes balloon to larger interest rates, catching some customers off guard if they didn’t read the fine print. According to a 2013 study by the Consumer Financial Protection Bureau, 43% of borrowers with poor credit scores will end up paying for interest because they failed to read the card’s terms and conditions.
High interest rates don’t do much damage to those who pay off their balances each month. But those looking for a financial edge with in-store credit cards may find that this frugal approach to shopping doesn’t jibe with specific branded cards.
Other Disadvantages to Smaller Credit Card Limits
A low credit card limit can affect your credit, but the disadvantages don’t end there.
- Limits how much you can finance in the store, which may have been the reason you applied for the card in the first place.
- You may not save as much money as you thought you would because you can’t put enough charges on the card.
When to Use In-Store Credit Cards
Not all in-store credit arrangements are bad. Used correctly, they can give customers substantial discounts on essential purchases. For those who already offer loyalty to a specific store, these cards can be a great way to get more money back for that loyalty. But to save a quick buck, it might not always be the best idea to use an in-store credit card without first considering the potential impact on credit and long-term interest rates.
Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.
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