Store credit cards are frequently frowned upon by personal finance experts, mainly because of their high interest rates (which are about about 22 to 26%), tendency to spark impulse purchases, and negative impact to credit reports if you apply for them frequently.
Despite that advice, Americans are using retail credit card accounts at levels not seen since December 2009, according to Equifax’s August National Consumer Credit Trends Report.
On a positive note, Americans are managing their finances more responsibly, too: Utilization rates of card limits have fallen, and payment ratios have increased, according to Equifax chief economist Amy Crews Cutts.
Store credit cards can present opportunities to better your finances — if you know how to use them to your advantage. Here are four situations where store credit cards can save your money and boost your credit scores:
If you’ve got cash, maximize your money
You’ve heard the typical store credit card pitch about saving a percentage off your purchase, but the inherent value of a store credit card is entirely relative to specific factors in your current financial life.
If you’re spending less than $500, for example, opening a store credit card probably isn’t worth the impact that applying for the account can have to your credit score, particularly if you are already in debt, plan to apply for a mortgage or refinance loan, or have recently completed other card applications.
Store credit cards may be a good option if your intended purchase is at least $500, the card offers 0% interest on the balance for at least six months, and you’ve already saved for the purchase in cash.
Suppose you’re purchasing a $2,000 television. Opening a store credit card with no interest for at least six months allows you to pay the minimum amount due while freeing up some of your cash to pay down other credit cards or loans that are costing you money.
If you’re debt-free, you could stash the cash in an interest-bearing savings account online (yielding about 1%), or a low-risk mutual fund, depending on market conditions, until the promotional period comes to an end, and it’s time to pay the balance in full to avoid interest rate charges.
Before deciding on a strategy with the store card, you should also compare the store promotion against other generalized rewards credit cards. For example, former Capital One executive and current Card Hub CEO Odysseas Papadimitriou recommends the Chase Sapphire Preferred Card, which offers a $400 statement credit when at least $3,000 is spent on the card during the first three months it’s activated.
Score extra discounts for essential purchases
Store credit cards have a tendency to tempt unnecessary spending, but if a retailer you buy essential items like prescription medication, food, or toiletries from has a store credit card that discounts purchases you’ll make regardless, opening one can save you money. Just be sure you understand the terms, and pay balances in full to avoid sky-high interest charges.
The Target REDcard offers a 5% discount on every purchase; the Wal-Mart store card offers cardholders additional discounts on gas purchased at Wal-Mart or Sam’s Club stations.
Build credit during spending seasons
Holiday shoppers are bombarded with offers for store credit cards, and generally, they’re not worth the savings they promise — with the exception of one scenario.
[pull_quote align=”left”]If you need to build or repair your credit history and you find a store credit card that discounts on purchases you’ll make for several items on your holiday gift list, and you’ve already saved the cash, then that card can help you build positive credit history.[/pull_quote]If you need to build or repair your credit history and you find a store credit card that discounts on purchases you’ll make for several items on your holiday gift list, and you’ve already saved the cash to cover your holiday shopping — they can help to build positive credit history from spending you’ve already budgeted and planned.
For department store shoppers, Papadimitriou recommends the JCPenney and Macy’s store cards which offer 20% discounts on purchases made the day the card is opened.
Training wheels
If you’ve been declined a for a major credit card or ruined your credit in the past, store credit cards can build a positive credit history — while teaching responsible credit use.
To make the strategy work, however, you must understand three aspects of credit: Do not apply for several store credit cards in a short period of time, or close store cards you no longer use.
Additonally, you must learn to manage your credit utilization ratio, which is the amount of open credit you have compared to balances owed. Regardless of whether you pay balances in full each month, ideal credit utilization ratios are at or below 30%. Beyond that, you risk negatively impacting your credit score.
Because store credit card limits are low, managing the utilization ratio is tricky. For example, you shouldn’t charge more than $150 on a $500 credit limit card.
Using credit responsibly is a learned behavior. The practice you’ll get from managing store credit cards can be invaluable in saving you from the financial nightmares that high credit limits (and even higher debt potential) can present when misunderstood.
