Ah, store credit cards – retailers love temptsing you with those shiny plastic cards at checkout. But are store credit cards good or bad for your credit score? The truth is, it's not a simple answer. In today's Flik Eco blog, we'll explore the world of store credit cards, their impact on your credit, and whether they're worth the potential risk.
Are Store Credit Cards Bad For Your Credit Table of Contents
How Do Store Credit Cards Work?
How Do Store Credit Cards Work?
Store credit cards are offered by retailers to their customers, often as a way to encourage loyalty and increase sales. They usually come with special rewards, discounts, or perks related to the store, but can also have some drawbacks, particularly when it comes to your credit score.
Interest rates and fees
Store credit cards often have higher interest rates and fees compared to regular credit cards. It's not uncommon to see store credit cards with interest rates around 25% or higher. This can cause potential issues if you carry a balance on your card, as you'll quickly accrue interest.
Rewards and perks
The lure of store credit cards often lies in their rewards and perks. They may offer discounts on your purchase, sign-up bonuses, cash-back rewards, and other benefits related to the retailer. While these perks can be enticing, it's essential to weigh them against the potential impact on your credit score.
Impact of Store Credit Cards on Your Credit Score
Store credit cards can impact your credit score in several ways, both positively and negatively, depending on how you use them.
Credit utilization
Credit utilization is the ratio of your credit card balance to your credit limit and is an essential factor in calculating your credit score. If you have a low credit limit on your store credit card, as is often the case, it can be easy to max out the card and hurt your credit score. A high credit utilization rate can contribute to a lower credit score.
Hard inquiries
When you apply for any credit card (including store credit cards), a hard inquiry is performed on your credit report. This temporary dings your credit score for a few points and stays on your credit report for two years. If you're constantly applying for new store credit cards, these hard inquiries can add up and harm your credit score.
Payment history
As with any credit card, your payment history has a significant impact on your credit score. If you use your store credit card responsibly and make your payments on time, it can improve your credit over time. On the flip side, missing payments or carrying high balances can lower your credit score.
Length of credit history
Store credit cards can help you build or extend your credit history, which can boost your credit score over time. However, closing store credit cards – especially those you've held for a long time – can hurt your credit score, as it reduces the average age of your credit accounts.
Is It Worth Opening a Store Credit Card?
There's no one-size-fits-all answer to whether store credit cards are worth the potential risk to your credit score. Some questions to consider include:
- Is the store card's interest rate significantly higher than a standard credit card?
- Can you manage your credit utilization to avoid maxing out the card?
- Are the rewards and perks worth the possible impact on your credit score?
- Will opening a new credit card hinder your chances of getting approved for more important loans in the near future?
Are Store Credit Cards Bad For Your Credit Example:
Imagine you have a store credit card with a limit of $1,000 and your current balance is $500, giving you a credit utilization rate of 50%. With high interest rates on store credit cards, you'll accrue interest quickly if you carry that balance. If you open another store credit card for a different retailer, you'll have another hard inquiry on your credit report and could potentially have an even higher overall credit utilization rate, leading to a lower credit score.
However, if you use your store credit card responsibly, keep your credit utilization low, and make timely payments, you may find that store credit cards offer worthwhile rewards and perks, making them a good fit for your financial situation.
To sum it up, store credit cards can be good or bad for your credit score, depending on how you use them. If you're a savvy shopper who never carries a balance, a store credit card might offer valuable rewards and perks. However, it's essential to be mindful of the potential risks and ensure you're responsibly managing your store credit cards.
If you found this article helpful, feel free to share it with your friends and check out our other Flik Eco guides for more personal finance and investing tips. With knowledge at your side, you'll be better equipped to navigate the world of money and make smart financial decisions.
