Pros and Cons of Retail Credit Cards

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Picture this: You're at the checkout counter of your favorite clothing shop, and the cashier asks if you'd be interested in signing up for a store credit card. You'd get a discount on your in-store purchase, right then and there.

While enticing, knowing what you're getting into when you sign up for a card is important. Here are the pros and cons of retail credit cards, and how to get the most out of them:

Let's look at the pros and cons of store credit cards:

Pros

There are plenty of major retailers and stores that offer branded credit cards. A plus of a retail credit card is that it might come with discounts, free shipping, and one-time deals and promos that reward you for being a loyal, frequent shopper.

Another perk of retail credit cards is that they tend to have lower minimum credit requirements. So, if you have a thin credit file or a less-than-stellar credit score, you still have a good chance of getting approved for a card. Plus, practicing responsible credit card behavior, like making on-time payments and keeping a low balance, can help build your score.

Cons

Now, for the downsides. A significant downside of retail credit cards is that they tend to have higher APRs. So, if you don't pay your balance in full each month, you could be looking at paying significant interest fees.

For example, let's say the APR for a retailer-branded credit card is 26%. If you carry a $1,000 balance and make the monthly minimum payment of $40 a month, it'll take you over three years (37 months, to be exact) to pay off that debt and the amount of interest you'll be paying is over $450.

Other cons of retail branded credit cards are that the spending limits tend to be on the lower end. Plus, they can be limited in their use because you can only use them at certain stores. Which stores depend on the type of retail credit card– closed-loop card or open-loop card.

Closed-loop cards are cards that can only be used with a single retailer or group of retailers. While branded with a retailer, open-loop cards can be used anywhere, much like a standard credit card. If your card is a closed-loop card, which means you can only use them to shop at that particular retailer, then you won't have free reign over where it can be used.

And don't forget, like with any new credit card, when you apply for a retail credit card it will likely result in a hard inquiry, which could have a negative impact on your credit. Also, whenever you get a new credit card (retail or not), your average age of accounts goes down, which could also have a negative impact on your credit.

Now that we've gone over the pluses and minuses of store-branded credit cards, let's go over a few ways you can make the most out of them:

Pore over the fine print

Getting lured into a one-time discount at checkout is far too easy. But before you sign up for a store-branded credit card, take a step back. Check the APRs, rewards program, perks, and limitations. What are the late fees, cash advance fees, and over-the-limit fees?

By understanding the rates, fees, and generally, what you're getting into, you can decide whether a particular card is a good fit for you.

Choose retailer cards where you already shop frequently

The best store-branded cards are the ones where you're already a loyal shopper. That way, you'll rack up cash-back rewards and points more quickly. Plus, you'll have a far easier time using your rewards, discounts, and perks like free shipping and extra days for returns.

Sticking to just a few retail credit cards is also a good idea. That way, you're not spreading your rewards-earning efforts thin. Further, having a bunch of retail cards means keeping track of your balances can prove to be more challenging.

Keep a low balance

If possible, pay off your card in full each month. That way, you can enjoy the perks of a store credit card without paying higher-than-average interest rates.

If you can't pay your card in full each billing cycle, aim to keep a low balance on your card. Paying your credit card bill will help you save on interest and keep your credit card usage low, which helps build your credit.

Beyond that, the risks of carrying too much credit card debt are many: fewer rental options, missing out on credit card offers, and having trouble saving for retirement or emergencies.

Beware of overspending

The holidays, summer travel, and back-to-school can be peak times for spending money. In turn, you might find yourself putting too much on your retail credit cards, and suffer from a holiday debt hangover.

To curb spending during certain times of year and seasons, stick to a budget to limit your spending. You can also set spending alerts to help you keep track of what you're putting on your card.

Make on-time payments

As payment history makes 35% of your consumer credit score, it's key to stay on top of your credit card payments. Otherwise, you might see your score dip, you're on the hook for fees, and you might incur a delinquency on your report.

Know the difference between promotional offers and promotional financing plans

Many retailers feature financing plans for cardholders. There are two main types of financing plans: no or zero-interest promotions, and deferred-interest promotions. A zero-interest plan that no interest will accumulate during the promotional offer.

On the other hand, a deferred-interest plan means you won't be charged interest during the promotion period. After the period is over, interest fees will kick in. So, if you aren't able to pay off the purchase before the promotional period, you're looking at a lot more in interest fees than anticipated.

Bottom line

A retail credit card could be a good choice for you. By being aware of their advantages and downsides, and practicing mindful spending, you can make the most of your retail credit card and build your credit score.

Get your FICO® Score from FICO, for free. No credit card required.

Jackie Lam

Jackie Lam is a personal finance writer whose work has appeared in Salon, Business Insider, and GOOD.