Personal Finance Writer
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Retail store cards can sometimes be the easiest way to start building credit as they are easier to get approved for even with poor or limited credit.
Store cards, however, may also come with a few downsides. The card will most likely only work at one store and the interest you’ll pay if you carry a balance will be, on average, considerably higher.
If you have a retail card and feel it’s time to upgrade but don’t know how to proceed, read on. Here’s all you need to know in order to apply for a regular card – and what to do with your old store card once you have other credit options.
See related: 2018 Retail Store Card Survey: Beware 30 percent APRs, ‘special’ financing
Upgrading from a store card: What you should consider
Why retail cards are easy to get – and why you need to upgrade
Retail store credit cards are usually easier to get. That’s because retailers are often willing to take the risk of extending credit to consumers with limited credit in order to lock in purchases at their stores.
“How many times have you been in the checkout line and they say, ‘Hey, if you sign up for this card, we’ll give you 10 percent off’?” said Freddie Huynh, vice president of credit risk analytics for Freedom Financial Network. “They’re always striving to get customers to buy more products at their stores.”
Store cards, however, can also be more punitive than regular credit cards.
Retail cards may come with an enticing offer – like a no-interest deal on purchases for the first six months – but they also carry potential financial pitfalls for unwary consumers.
“Store cards are incredibly unforgiving if you miss a payment or for any reason default on the terms of service of the card,” said David Gafford, marketing director for Shift Processing, a credit card processing company.
- Indeed, the average median APR for retail cards may be nearly five percentage points higher than that of general-purpose cards, according to a November 2018 survey by CreditCards.com.
- Also, if consumers use the introductory no-interest deal to purchase something, then fail to completely pay it off by the time the promotional period ends, retail cards often charge retroactive interest on the entire purchase price.
Be deliberately cautious when using retail cards
When you’re trying to build up a solid credit record it’s not the time to run up balances or miss payments. “Use the card responsibly,” Huynh said.
That means being deliberate, said Deidre Davis, chief marketing officer for Michigan State University Federal Credit Union.
“Keep the balance low, shop at the retailer often and make at least minimum payments on time each month,” she said. “Or, better still, pay off your entire balance every month.”
The trick, he said, is to think of it solely as a credit-building vehicle, making regular but manageable purchases at the store to slowly build your credit.
Ready to apply for a general card? Look for ‘starter’ credit cards
The most basic starter card is a secured credit card. This is one where you put down a cash deposit that is usually equal to your credit limit on the card.
Many banks and lending institutions offer secured cards, though even with these, some applicants will get denied due to red flags like a past bankruptcy.
- If that’s your case, check out a flexible option, like the Open Sky Secured Credit Card.
- Open Sky makes a point of not checking credit histories.
See related: First credit card dilemma: Student card vs. secured card
Card options when upgrading from a retail store card
The main challenge of a secured card is that you won’t be able to use the money in the deposit for any other purpose.
However, if you have managed a store card responsibly, you may be eligible for an unsecured starter card, meaning one where no deposit is required.
The industry has designed cards specifically for people new to credit cards, or those returning after financial difficulties. These cards generally come with higher-than-average interest rates and lower-than-average credit limits.
- For instance, the Capital One Platinum card is for customers with credit scores in the high-500s to low-700s range.
- It has no annual fee but also offers no rewards.
- The APR is a variable 26.96 percent and the introductory credit limit can be as low as $300.
- A customer looking for a starter card may have better luck applying through her own bank or credit union.
- The MSU Federal Credit Union, Davis said, offers its members a Visa card with an APR as low as 8.9 percent.
- For those with higher credit scores (starting in the high 600s), Gafford likes the Citi Double Cash Card.
- This card offers 2 percent cash back on purchases – 1 percent at the point of purchase, and 1 percent when you pay. “It encourages paying off the balance every month,” he said.
See related: Shoppping for a new credit card? Don’t overlook smaller banks
What to do with the store card after you open a regular credit card
There are differing opinions on this question. Closing your store card will diminish your credit utilization rate – the percentage of your total available credit that you use each month – and the average age of your credit accounts.
Closing your store card can be especially damaging if this was your first card or if you don’t have other type of loans in your credit report, such as a personal loan or an auto loan.
“If you already have a retail store credit card, don’t close it,” Davis said.
For reference, here’s how FICO determines a credit score:
- Payment history: 35 percent.
- Amount of debt (also known as credit utilization): 30 percent.
- Length of credit history: 15 percent.
- New credit: 10 percent.
- Credit mix: 10 percent.
Huynh said he is generally a strong advocate of keeping previous credit accounts open. However, “if the consumer knows that having another card would be too tempting for them to spend, and they don’t have a lot of self-control, I could understand why it may be prudent for them to close the card,” he said.
Stick to one new card at a time
Remember that FICO breakdown? A full 10 percent of your credit score looks at how much new credit you have opened. Applying for too many new accounts at once sends up a red flag.
Plus, each hard inquiry from every new card application dings your score a few points – regardless of whether you get approved for the card. Multiple hard inquiries in a short period of time may seriously hurt your score.
“Don’t go crazy,” Huynh said. “Don’t go opening three new credit cards. One is going to be good enough.”
Store card debt? Consider a balance transfer
If you’re currently carrying a balance on your retail store credit card, chances are you’re paying a hefty amount in interest each month.
If you’re looking for a new unsecured card, look for balance transfer offers that would allow you to transfer the current balance on your store card and pay it off free of interest for a set period of time.
This will reduce the amount you’re paying every month on interest and allow you to get out of store card debt faster.
See related: 9 things you should know about balance transfer cards
Keep building credit by managing cards responsibly
Then, whether you’ve kept your store card open or not, focus on staying well within your credit limits, spending within your means and paying off your bills when they come.
“It’s going to be a slow and gradual increase” in your credit score, Huynh said, “but it will be an increase.”
Eventually, as you become eligible, card issuers may offer you a card with better conditions, benefits and rewards.
“As the consumer exhibits good credit behavior on their card,” he said, “that’s the surest way to improve their credit. Card issuers are always looking for good customers.”