The Drawbacks of Retail Credit Cards
Posted on January 30, 2013 by Michael Martin Leaño
Not all credit cards are created equal. There are regular cards, and there are store credit cards, which are offered by many large retailers. The main lure of these retail credit cards is that they offer discounts on all your purchases, but before you decide to get one, consider the following drawbacks:
Drawback #1: High interest rates
When you look for a new credit card, the first thing you look at is the interest rate. Why? That’s because you’ll end up spending more with a higher rate, no matter what its perks may be. Unfortunately, retail credit cards are notorious for their steep interest rates, which usually hover around the upper end of 19 per cent to even 23 per cent per year.
To give you a better perspective, a regular, bank-issued credit card has an average interest rate of around 11.99 per cent to 13.5 per cent per year. That’s almost a difference of 10 per cent! And if you miss your payment on your due date, expect interest charges to add more to your costs.
Drawback #2: Low credit limits
Store cards usually have low credit limits as well. You’re looking at a few hundreds, which is really small compared to regular credit cards. Among regular credit cards, those with a limit lower than $1,000 and interest rates higher than 20 per cent are usually given to people with poor credit. However, you’ll get the same terms with a store card even if you have a high credit score.
Yes, you can ask for a credit limit increase for your retail card later on, but you’re stuck buying an item or two until then. With a low limit, your credit-to-debt will shoot up with just a couple of minor purchases. Buying a new pair of Nikes, for instance, usually costs around $150; if you had a credit limit of $500, your utilisation would already be at 30 per cent.
Drawback #3: Can lower your credit score
Since it’s so easy to rack up a high credit utilisation ratio, using your retail credit card heavily can actually lower your credit score. Granted, the same thing applies to regular credit cards, but you’re more susceptible with a store card because of its low credit limit. To offset this, make sure you keep your balance well below the limit and pay it in full every month.
If you apply for a retail credit card in every store you shop to offset the low credit limit of each, expect your credit score to go lower still. Whenever you apply for a credit card, the issuer would make a hard access on your credit file. If each hard access pulls down your score by a few points, imagine what it would do with several. And for a low credit limit? It’s not worth it.
Drawback #4: Limited to buying at the retailer
Your regular credit card can be used almost anywhere in the world. As long as there’s a credit card terminal in the establishment, you can use your card there. Your retail credit card, on the other hand, can only be used in the store that issued the card. So if you want to buy plane tickets, pay your library fines, or merely shop at a competing store, your retail credit card would be of no use.
Drawback #5: Encourages spending
The most problematic aspect of retail credit cards is that they encourage spending and getting into debt. Regular credit cards may also be guilty of this with their promos and ads, but store cards are more direct: they usually raise your credit limit as you charge more on your card, and they give discounts for using of their card. If you don’t have the restraint, you’ll end up buying more.