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Around the holidays, it’s especially easy to fall for a credit card sales pitch at the cash register. Many retailers will give you a 10% or 20% discount if you apply for a card on the spot. And while saving $50 or $100 could seem enticing, there are many reasons to avoid opening a store credit card, including a drop to your credit score because of increased credit utilization. Plus, there are shopping tricks, like making purchases through an online portal, that can give you nearly as big of a discount without the need for a hard credit pull!
And don’t just take the recommendation from me. According to a recent survey, nearly half of Americans who have had a store credit card regretted getting one. I doubt you’ll find similar statistics for folks with popular travel rewards credit cards. That’s because the miles, points, or cash back you earn with rewards cards (including certain no-annual-fee cards) can be worth much more than a one-time discount at checkout. And rewards credit cards can come with extremely valuable sign-up bonuses worth up to $500 in cash back or $1,000s in free travel!
Store Credit Cards Usually Have Small Credit Limits, and That’s Bad for Your Credit Utilization & Credit Score
Everyone knows the importance of a good credit score. It’s what banks use to determine your creditworthiness when you’re applying for a loan to buy a car or home. But not everyone realizes the factors that go into calculating your credit score. Payment history is one important factor, which is why we ALWAYS advise folks to pay card balances on time and in full each month.
But another important factor (30% of your credit score according to FICO) is your credit utilization ratio, which is your amount of card balances divided by your total available credit across all of your cards.
Now, let’s say you don’t have any credit cards and decide to apply for a store credit card at checkout to take advantage of a small discount on your purchase. In my experience, the credit limit you get on a store credit card typically isn’t much more than the amount of your purchase. So if you’re spending $1,000, you might get a $2,000 credit limit. Even if you pay the balance off in full, your credit utilization will get reported as 50% ($1,000 balance / $2,000 limit). This utilization ratio is TERRIBLE and could negatively impact your credit score! Ideally, it’s best to keep your credit utilization below 10%.
It’s easier to get approved for most store credit cards because the standards are usually lower than what’s required for other bank-issued cards. But that’s not necessarily a good thing. Sometimes it’s worth building your credit history as an authorized user or with a secured credit card to make yourself eligible for more travel credit cards. My first credit card was a no-annual-fee cash back card. But now that I know much more about credit cards, I usually recommend the Chase Freedom® or Chase Sapphire Preferred® Card to folks looking to apply for their first card.
Use Rewards Credit Card Tricks to Still Earn Discounts at Your Favorite Retailers
You don’t need a store credit card to save money or get a discount when shopping. For example, online shopping portals offer an easy way to earn lots of bonus miles, points, or cash back at many popular retailers. Nearly every airline, hotel, and bank has some kind of shopping portal to help you earn rewards when shopping online. And nowadays, many retailers allow you to shop online and pick-up in store, so these portals are a really easy way to earn rewards for your purchase.
Personally, I use the Chase Ultimate Rewards portal when making an online purchase. But I suggest checking shopping portal aggregator sites like Cashback Monitor or Evreward to check which portal is offering the best return rate for your purchase.
And AMEX cardholders can take advantage of AMEX Offers to earn easy bonus points or save money on in-store or online purchases. These targeted offers include deals like 20,000 bonus points, 10% discounts, or $100+ statement credits when you shop at popular retailers. Plus, you can sometimes combine an offer with other coupons or discount code to get even more savings!
Be sure to bookmark our AMEX Offers page so you don’t miss out the latest deals!
Let me know your thoughts on store credit cards in the comments below!