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Store Credit Cards and Fair Credit: How They Help and How They Can Hurt

Dec. 22, 2014
Credit Card Basics, Credit Cards
Store Credit Cards and Fair Credit: How They Help and How They Can Hurt
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Store credit cards are a double-edged sword: They can help people with bad credit move up, or push people with fair credit ratings down.

Store cards have high APR interest rates and fees, few — if any — rewards and low credit lines. Your interest rate depends on your credit score when you apply: the better your FICO score, the lower the interest rate. As credit cards for consumers with average credit scores or lower, they can be an opportunity to build your FICO score higher when used with discipline.

If you are a novice to the world of credit cards and have little credit history, it’s important to know how credit cards work before you begin.

How they can help

Because store credit cards typically have a lower credit limit, they can help newbies begin their journey into the world of credit. If you pay off the balance every month, this is a good way to lower your credit utilization score, which makes up nearly a third of your FICO score. You want your credit utilization to be no more than 30% of your total available credit.

The trick here is to have the discipline to pay off your full balance each month, which will not just improve your credit utilization, but also your on-time payment history, which makes up 35% of your FICO score.

» MORE: How is credit card interest calculated?

How they can hurt

Because of their low credit limits — some cards have lines as low as $100 — unless you can quickly pay off the balance, they will increase your credit utilization score. And if impulse control problems got you into a rocky credit situation to begin with, having a credit card at your favorite store may not be the best solution to your spending dilemma.

It may make better sense to sign up for a secured credit card. The downside: Such cards require an upfront security cash deposit, and they probably won’t give you any rewards.

If you have fair credit or higher, a rewards credit card might be the better way to go. Interest rates for these cards tend to be in the 12.9% to 17.9% range, compared with store cards, which may have interest rates of 25% or higher.

Store credit cards can help create your credit history or resurrect bad credit scores — if used with caution. Otherwise, they are unsheathed sword on which your credit score may fall.

Image via iStock.