Why You Should Not Sign Up for That Retail Credit Card

Why You Shouldn't Sign Up For that retail credit card

No matter how tempting the offer sounds, do NOT sign up for that store credit card. We’ve all been there-you’re at the register making your purchase when the cashier asks if you’d like to sign up for the store credit card and the offer is always the same. If you sign up today, you’ll receive X% off your purchase. When you’re about to make a purchase, an additional 15-20% discount sounds like a good deal. Plus, what’s the harm in another card; you’ll just use it when you’re shopping at this store. Let’s stop right there and look at a few things:

1. Retail cards have very high interest rates

A 2020 retail card survey (1) found that the average store-only credit card interest rate is an exorbitant 29.99%! That is almost 10pts higher than the average non-retail credit card interest rate. Should you get behind on payments and be forced to pay the minimum, the interest rate alone will wipe out whatever discount you secured.

2. Signing up for a new card can negatively affect your credit score

Every time you sign up for a credit card, your credit score takes a hit. If you are trying to secure a loan or buy a house around that time, you may not want anything to adversely affect your chances. Additionally, because these cards have lower limits than the average non-retail card, your debit to credit ratio can increase.

3. You may be tempted to spend more

Many stores will offer ongoing discounts for credit card holders. For example, if you sign up for a store credit card you receive an additional 10% off every time you shop with them. This offer may encourage you to overspend at the store because the discount seems enticing. Additionally, credit card holders often get exclusive deal emails which also prompts unnecessary spending.

However, there are only two reasons I would ever encourage someone to get a store card:

The card provides lifetime value: I made the mistake many years ago of getting a GAP card. At the time I shopped there fairly often (along with its sister stores). However, my style has changed and I no longer shop there and the card is just sitting in my wallet. If you shop at a store frequently, and know you will continue shopping there for quite some time, then I would say go for it. Don’t cave in at stores that are faddish.
You are trying to build credit: Because store cards offer much lower spending limits than traditional credit cards, they could be a good option for someone trying to build their credit. A store card could be a good temporary solution to building credit. However, don’t get stuck with a “store-only” card. Try to get an open-loop card which allows for purchases both at their store and at other retailers.

(1) Source: Retail Store Cards APR Hold Steady Despite Fed Rate Cuts. Barri Segal, October 2020. https://www.creditcards.com/credit-card-news/retail-store-credit-card-survey/