Before opening up a new credit card from one of your favorite stores, it’s important to keep in mind how they can affect your credit score. Applying for store credit cards can have a positive and negative effect on your credit.
To help you understand the impact, we looked to QLCredit, a website and sister company of Quicken Loans. QLCredit specializes in helping people understand what’s on their credit report. It also provided us with some of the pros and cons of opening up store credit cards.
Pros of Opening Store Credit Cards
Here are a few advantages when applying for a store credit card:
Helps Establish and Build Credit History
When offered to open up a credit card at checkout, don’t automatically assume it’s a bad idea. Opening one can actually help build your credit history.
“Opening up a store credit card and paying the payment on time and keeping the utilization under 30% can help establish credit if you haven’t gotten a credit card or loan before,” according to QLCredit.
Paying off your store credit card on time could help prove that you’re responsible with your money – this will help increase your credit as time goes by.
“This credit history can help you get additional lines of credit in the future,” QLCredit indicates. “And it may help qualify you for lower interest rates.”
For example, if you’re looking to buy a home, your credit history could help you save thousand of dollars on a mortgage!
Discounts on Store Items
According to QLCredit, you may get the perk of getting loyalty points, discounts and money back on items you’re already planning on buying when creating a store credit card account.
Also, getting a store credit card for a place you shop at regularly will help you get bonus coupons and special deals in the future.
Cons of Opening Credit Cards
Before you apply for a store credit card, here are some disadvantages:
Impacts Your Score Negatively in the Short Term.
Another tip – applying for a credit card can temporarily hurt your score, particularly if you’re looking to get a mortgage.
“Lenders will do a hard pull on your credit, which may temporarily lower your score,” the website indicates. “This can be off-set over time with on-time payments.”
Higher Interest Rates
One of the major cons of opening up a store credit card – they generally have higher interest rates than traditional credit cards.
“Store credit cards typically have higher interest rates than regular credit cards,” according to information found at QLCredit. “If you pay your balance on time and in full, this will not impact you, however if you cannot pay in full, you’ll end up paying more in interest over the long run.”
Applying for too many store credit cards can negatively impact your score. So keep tabs on how many you’re opening to avoid this.
Low Credit Limits
Store credit cards often have low credit limits – meaning you don’t have to spend as much money. But spending less money isn’t always a positive thing.
“Lower credit limits will allow you to spend less money,” the QLCredit website advises. “With a lower credit limit, it’s easier to have a higher credit utilization ratio (how much debt you have on the card relative to the credit limit), which can negatively influence your credit score if it’s greater than 30%.”
According to Ciele Edwards, author of “Does a Low Credit Card Limit Hurt Your Score?”, you want to have a low credit-utilization ratio so you’ll have a higher credit score – making you less of a financial risk to lenders.
“A high credit-utilization ratio indicates that you pose a greater financial risk to lenders,” said Edwards. “Maintaining a high credit-utilization ratio can prevent your credit score from increasing.”
Store Credit Card Takeaways
Remember, if you open up a store credit card – keep in mind the precautions listed above. And make sure to pay all your bills in full and on time so you can build your credit.
And to help you know what you owe each month, use QLCredit’s Debt Tracker – a place to see all your loans, balances and monthly payments in one, convenient place.
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