Using Store Cards To Build Credit
The Pros and Cons
January 4, 2016 by Mark Dye
We’ve all been there: we’re at the checkout of a department store when the cashier asks, “Would you like to open a store card and save 15% today?” Depending on how much you’re purchasing, it might be a good deal—but it might also just add to your debt load. So when is using a store card a good idea, and when is it best avoided? Well, that depends …
A good thing about a store card is that it’s often easy to apply for and get approved. This makes it a way for those without a strong credit history to build up their credit and show they can meet such a financial obligation.
Opening a card can also positively affect your credit score depending on its credit limit and how much of that limit you use. This is because part of a credit score is determined by the ratio of how much credit you use to how much you have available. So, for example, a $1,000 purchase on a card with a $10,000 limit will have a stronger positive impact than that same purchase on a card with just a $5,000 limit. Something to keep in mind when applying.
Perhaps the best way to ensure that a store card helps your credit is to pay off the full balance as soon as you can. Not only will that reduce the amount of interest you have to pay, it also increases that credit-used to credit-available ratio.
Simply applying for a card can have a negative impact on your credit because it requires what is called a “hard” inquiry, which can drop your score anywhere from 15-30 points per inquiry. This might have a direct impact on the interest rate you get on any type of credit line if it drops you from one credit profile to another. For example, if your credit score is 730, you tend to get the prime interest rate. But if that one inquiry drops your score to 700, you might wind up paying a higher interest rate.
Another factor is the length of time you’ve had open credit accounts. Longer is better, and you actually wind up making it shorter by opening a new account. This can be especially challenging if you’ve recently opened up several new accounts, or are relatively young and just haven’t had credit for that long.
Many store cards also tend to have higher interest rates than standard credit cards, which means it will take you longer to pay off the balance. It also means that aforementioned credit-used to credit-available ratio won’t be as high, which won’t boost your score as much as a higher limit card could.
In the end, whether or not a store card is right for you depends on a number of factors, such as your current credit score, financial goals, and if you have enough monthly income to afford a new payment. In the right situations, however, they might be a good way to get what you need while helping build your credit.