Published in: Credit Cards | Oct. 16, 2019

The Only Good Reason to Open a Store Credit Card

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Just beware of sky-high interest fees.

Credit cards, when used responsibly, are one of the most tried-and-true ways to build credit fast. Unfortunately, many folks who need to build credit don't have the right credit score to qualify for a good credit card.

That's where store credit cards come in. When used properly, they can be a good tool to boost your credit score and qualify for better deals on credit cards. However, if you're not careful, they can also land you in high-interest debt.

Someone paying on a credit card reader with flowers in the background.

Image source: Getty Images

Opening a store credit card can be a good way to build credit

Generally speaking, it's easier to get a store credit card than a regular, unsecured credit card, even if your credit is sub-par. This is because retail stores stand to gain a lot when you open their credit cards. Not only will they make money off any interest and fees you pay, but you'll likely be tempted to shop at their store more often if you're a cardholder.

In terms of your credit score, you probably stand to gain the most from opening a retail credit card if you've got near-prime credit. This is defined as a credit score of 620 to 659. If your score is higher than 659, you might want to consider a general purpose credit card with better terms to continue building credit. If your score has fallen below 620, or if you don't have a credit score, your chances of approval, even for a store credit card, are low.

According to the latest CFPB Consumer Credit Card Market report, 58% of near-prime consumers were approved for store credit cards in 2018. Comparatively speaking, under 40% of near-prime consumers were approved for general-purpose credit cards in the same year. Approval rates for consumers with credit scores below 620 drop significantly, to less than 10%.

What to do if you can't get approved for a store credit card

If you have no credit score, or a low credit score, you'll probably have to look to other ways to build your credit. Secured credit cards are certainly worth considering, as they generally don't have credit requirements and will report your monthly payments to the credit bureaus.

As always, there are strings attached. Secured credit cards require a refundable deposit, typically between $49 and $500, to mitigate the risk involved in granting a line of credit to someone with a less-than-perfect credit history. They also tend to come with higher fees and interest rates. The best way to use a secured credit card is to put one or two small monthly bills on it and always pay off your credit card statement in full before it's due. That way, you'll at least avoid interest fees.

Store credit cards are one of the most expensive forms of credit

While store credit cards can be a good way to build credit without having to offer up a deposit, or spend any money at all, they can also be extremely expensive if you don't pay them off each month on time.

The average APR on general purpose credit cards in 2018 was 20.3%, according to the CFPB, which is already high. Retail credit cards come with an even higher APR, hitting an average of 26.4% in 2018. To give you an idea of how much that interest rate could cost you, if you rack up even a $1,000 balance and only pay the minimum each month, it could take you over eight years to pay off that balance, and you could end up spending almost $1,500 on interest fees in the process.

If you're looking to increase your credit score without paying unnecessary fees, opening a retail credit card can be the right decision. However, it only works if you pay off your balance in full every month and avoid late payments. Otherwise, the costs will far outweigh any beneficial bump to your credit score.

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