Can a Store Credit Card Help Fix Your Bad Credit?

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Store credit cards can be useful for building a better payment history, but they’re also a really easy way to accumulate more high-interest debt.

When it comes to building your credit history and improving your FICO score, there’s a bit of a chicken-and-egg scenario: You need a good credit history in order to be approved for a loan or a credit card, but you need to have had previous loans and credit cards in order to have a good credit history.

Folks with bad credit or no credit will find that they have some trouble getting a new loan or credit card to build up their score. If you already have outstanding debt, we suggest you focus on making your payments on-time and using a debt repayment plan, like the Debt Snowball or the Debt Avalanche methods, to lower your balances.

But if you don’t have previous debt—or you’re looking to start fresh with a new account—there are some options available to you. For instance, certain kinds of bad credit loans, particularly long-term installment loans, will report your payments to the credit bureaus and help bolster your credit history.

Another option is taking out a store credit card, the kinds that are offered at pretty much all major retail outlets. But are these cards really worth the risk? We’re not so sure. While pretty much any form of credit can be helpful if you use it correctly, we think the temptations with store credit cards are too great.

But don’t let us make the decision for you. We broke down the pros and cons of store cards so that you can decide what’s best for you.

Pro: They’re easier to get than regular credit cards.

The point of a store credit card is to get you to spend more at a given retailer. So when Home Depot issues you a credit card, it’s a card that can only be used at Home Depot. In return for you getting a small discount or earning rewards, Home Depot gets more of your business than they might otherwise.

This means that the incentives for approving these credit card applications are a little different than the incentives for regular cards. A traditional credit card company is much more concerned with issuing cards to creditworthy individuals, the kinds that have high FICO scores. But retailers? Not so much.

Basically, you stand a better chance of getting approved for a store card than you do for a regular card. Sure, they care about your credit score, but they have a much lower cut-off point.  So if you’re looking for a new account to help build up your credit, a store card is a much more viable option than a traditional card.

Con: Pretty much everything else.

Yeah. So store credit cards might be easier to get than a regular card, and they’ll give you extra discounts or rewards at the store in question, but those are the only two ways in which they can be considered any better than regular cards.

And even the “easier to get” part doesn’t really make them better than regular cards. Payday loans, for instance, are super easy to get, much more so than a regular personal loan. But the reason they’re so easy to get is that they cost way more and are actually kind of dangerous.

And while store credit cards aren’t nearly as dangerous as payday loans (or other types of no credit check loans, for that matter), they’re still much riskier than traditional loans.

Financial Coach Eric Black, the founder of Financial Freedom Mentors (@ffmentors), lays out how he and his colleagues approach store credit cards:

As a rule of thumb, we discourage our clients and followers from opening new store credit card accounts. The primary reasons are:

1.) There is little to no benefit to the cardholder. True, it can help build their credit if they are disciplined in using the card and paying it off, but most cards offer a 10 percent discount for opening the card. On a $100 purchase that is only $10. And there are only benefits to using that card at that one retailer. Other cards offer much better rewards and benefits.

2.) The results can be disastrous! While it’s easy to apply and start using the card right there in the store, one little slip-up and it will cost you a lot. One late payment, huge fees, and interest charges. The same with spending over your limit. That initial benefit you received for opening the card can quickly get wiped out.

3.) The interest rates on those cards are outrageous! They rarely offer a low introductory offer, and as mentioned above, if you make even one late payment the rate may skyrocket even higher!

4.) Settling disputes can be challenging. Unlike a major credit card company like American Express, Discover, or Chase, store credit cards are often provided and managed by small third-party financial companies. Resolving issues such as fraudulent charges, incorrect fees, etc. can be very challenging. Customer service from a major provider is far superior.

According to Barron’s, the average APR for store credit cards is 24.99 percent while the average APR for regular cards is only 16.15 percent. So your average store card is over 50 percent more expensive than a regular card. Their rates are more like the rates charged on cash advances.

Now, if you are disciplined and immediately pay off all your balances, then those interest rates shouldn’t pose a problem. In fact, so long as you pay off your balances during the 30-day grace period, you won’t be paying any interest at all. Sounds great, right?

Well, yeah. It does. But here’s the real question: Are you really disciplined enough to do that?

There are better options than store credit cards.

Credit cards can be a great way to earn rewards and to finance large purchases, but in some ways, they’re much too easy to use. Before you know it, you’ve maxed out your card, and you’re having trouble making your payments every month. This holds true for regular cards and store cards, but at least regular cards come with lower rates and better rewards.

If you’re looking to build your credit with a store card, might we suggest you use a secured credit card instead? While they don’t have many of the benefits of store cards, they also don’t have as many risks. And when you’re trying to dig your way out of a bad credit score, less risk is usually the way to go.

To learn more about fixing a bad credit score, check out these related posts and articles from OppLoans:

What’s been your experience with store credit cards? We want to hear from you! You can email us or you can find us on Facebook and Twitter.

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eblack-HS croppedEric Black is a financial coach and the founder of Financial Freedom Mentors (@ffmentors). Eric works with individuals and couples to help take the stress out of managing their finances by creating an actionable plan custom tailored to their priorities. Having gone from being broke most of the month to now having a significant real estate portfolio and a net worth of over $1 million, Eric is able to relate with his clients and the financial challenges they are facing.

The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.