You’ve probably noticed that when you shop at a department store or other major retailer, the sales clerk will encourage you to sign up for the store’s credit card. Sometimes the pitch is as simple as “Would you like to save an additional 10% today?” Say yes, and suddenly there’s an application in front of you. Further, an application for a store card is more likely to be approved than an application for a bank credit card, even for those with less-than-great credit.
There’s a reason for all this. The store doesn’t just want you to buy stuff today. It would also like you to:
- Buy more stuff.
- Pay for all of that stuff over time, which means the store collects interest on top of the purchase price.
Getting you to spend more
When you have a retailer’s credit card, it gives the store leverage over your spending choices.
Store cardholders often get offers that are applicable only if they use the card. That provides an incentive to not only return to the store but also use the store’s card, as opposed to a general-purpose credit card that offers rewards. (The store also saves money on transaction fees when you use a store card rather than a general card.)
Even better, if the retailer can get you approved while you are standing there at the register, it may offer you a credit line larger than the amount you are spending. That gives the sales clerk the chance to tell you that you can spend even more than you were planning to.
If you’re going to pay interest on something you buy from a store — essentially turning a $100 purchase into $110, for example — the retailer would sure like to get a cut of that extra money. When you use a regular credit card, the store receives only the purchase price, while the bank that issued the card collects any interest. Use a store card, and the retailer shares in the windfall.
Store cards tend to charge higher interest rates than regular credit cards, and that’s partially to offset the risk of being a little looser with credit approvals. Another way store cards mitigate their risk is to offer lower credit limits than you would get with bank credit cards. If a cardholder is going to default, the risk to the retailer is a lot lower if the limit on the card is only $300 rather than, say, $5,000.
Building your credit
When you combine their limited usability, higher interest rates and lower credit limits, store cards aren’t the most efficient credit tools out there. But because they’re easier to qualify for, they can be a boon to those who have borderline credit or are just establishing credit. Just follow a few guidelines to use them to maximum credit-building advantage:
- Use the card. Make purchases and pay them off to demonstrate responsible credit behavior.
- Keep balances low. Optimally, you’ll want to keep your balance on any credit card below 30% of the credit limit.
- Pay in full every month. This minimizes your interest costs.
» MORE: How to build credit