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How Retail Store Cards Can Impact Your Credit

Retail store credit cards have the potential to help you build credit, but their ultimate impact depends on how you manage the account.

Photo by Ksenia Chernaya on Pexels

As you're shopping for the family and friends on your gift list this holiday season, there's a good chance you'll come across an offer to apply for a retail store credit card. In fact, you might even qualify for a special discount or rewards at your favorite store if you open a new account.

Yet before you jump at the chance to stretch your holiday budget, it's important to consider how applying for a store card might impact your credit. There are safe ways to open a new retail credit card, but if you're not careful with how you use the account you could impact your credit score.

You Can Use Store Credit Cards to Build Credit

Store credit cards act like traditional credit card accounts in several ways. One of the biggest similarities between these two forms of plastic is the fact that they both have the potential to help you build credit.

With most store accounts, a bank issues the card which is co-branded with a retailer. Depending on the card, you might be able to use it only with a specific set of retailers or you might have the freedom to use the account on a wider basis.

Either way, if the issuing bank reports the account to the major credit bureaus, the account should show up on your credit reports. Once this credit reporting component happens, the retail store card has the ability to help you establish or build your FICO® Score.

The Credit Inquiry

Anytime you apply for a new credit card of any type, the issuing bank will probably want to review a copy of your credit report. When this happens, the credit bureau that shared your information will post a credit inquiry. In some cases, a new credit inquiry could lead to a lower FICO® Score.

It is important to point out that FICO® Scores only consider hard inquiries that have taken place within the last 12 months. And some inquiries won't impact your FICO Score at all.

Applying for new credit is likely to have a minimal effect on your FICO® Score. In many cases, adding one extra inquiry to your credit report may result in fewer than five points off your FICO Score. However, the actual impact of a credit inquiry can differ from one credit report to the next.

Mistakes to Avoid with Retail Credit Cards

When you open a new retail store credit card, it's important to manage the account with care. Retail cards that report to the credit bureaus can influence your FICO® Score just like any other credit obligation.

Below are three mistakes you should avoid with your new account.

  1. Never pay late. Payment history makes up 35% of your FICO® Score. So, if the retail card on your credit report shows late payments, you might see your score decline.

    If you open a retail card that you can only use at a limited number of locations, there's a risk you might forget about the account (out of sight, out of mind.) However, you can schedule automatic payment drafts and calendar reminders to help avoid this potential pitfall.

  2. Don't overutilize the credit limit. FICO® Scores also pay attention to the percentage of your available credit in use — aka your credit utilization rate. When your credit utilization rate is high, it might impact your FICO Score in a negative way.

    Credit limits can sometimes be lower on store credit cards compared with general use accounts. And with a lower credit limit, it can be easier to use a large percentage of your available credit. This could cause your credit utilization rate to spike and might lower your FICO® Score as a result.

    To avoid this problem, be careful not to max out your account. You might also consider paying your bill early, before the statement closing date, in an effort to have your card issuer report a lower balance to the credit bureaus.

  3. Avoid carrying a balance. As mentioned, revolving a balance on a store credit card might raise your credit utilization rate. But this financial habit could also cost you a lot of money.

    When you carry a balance on a credit card — retail or traditional — interest fees may kick in. Interest rates on credit card debt tend to be expensive. So, it's best to pay your full credit card balance every month in over to skip this added cost.

    If you're working to pay off your credit card debt, it helps to have a plan. You can use the list of myFICO credit card calculators to help create one that works for your situation.

Bottom Line

Store credit cards can be helpful if you're trying to build credit. They can also represent a convenient way to pay for purchases with a retailer you frequent. In some cases, you might even earn rewards on your spending that you could use for future savings.

Yet just like any other type of account, the way you handle a retail credit card will determine the ultimate impact that it has on your credit, and on-time payments and low credit utilization rates should protect you from credit damage. And over time, the account could help you build positive payment history.

Michelle Black

Michelle Black, Founder of CreditWriter.com is a leading credit expert, financial writer, and speaker with nearly two decades of experience. Her work has been featured with major outlets such as Forbes, Reader's Digest, and U.S. News and World Report.