Financial Advice

The Pros and Cons of Retail Credit

The Pros and Cons of Retail Credit

How many times has the cashier across from you asked you this question: "Would you like to apply for our store credit card?"

When you hesitate, they follow up with: "It will qualify you for 10 percent off on all your purchases, including this one."

It is easy to say "yes." After all, signing up for the store credit card seems to make financial sense. You were already going to buy the items in front of the cashier. Why not sign up for the card, get your discount and spend less money? Then, when you pay off the item, you can cancel the card.

That does sound smart. Problem is; too many of us never follow through with that "payoff the charge and cancel the card" part. That could lead to financial problems done the road.

The truth? Retail credit cards rarely offer the best terms. There are some benefits to using these cards, just not many.

The problem

Here is the main problem with retail credit cards: They usually come with higher interest rates than do standard bank or credit union issued cards. This is important if you have a habit of not paying your credit cards in full each month.

You might intend to pay off your retail credit card in full as soon as your first statement arrives. However, what if you do not have the money? Then you'll pay only part of your bill. Then interest will kick in. Also, retail credit cards are famous for having interest rates in the high teens and low 20s. The interest on these cards can build quickly, leaving you with a debt load that gets larger and larger.

These cards, then, are far from ideal if you struggle each month to eliminate your credit card balances.

The cons

Those high interest rates are the biggest drawbacks of retail credit cards. However, they are not the only one. They are also not flexible.

You can use traditional credit cards most anywhere, at grocery stores, gas stations or area department stores. Store credit cards, though, only work at the retail establishment printed on the front of the card. That is a limited card. Remember, having too many open credit card accounts can damage your three-digit credit score. Why waste a credit account on a card that you can use with one retailer?

Another problem with store credit cards? They often have onerous terms, too. Yes, the interest rates are usually awful. However, so are the penalties. The late fees associated with store credit cards can be hefty. Those late payments will often also send your card's interest rate even higher. At the same time, many store cards do not give you as much time to make your payment as do traditional credit cards.

Finally, there are simply better credit card options out there. Banks, credit unions and other card issuers offer a wide variety of credit cards that come with lucrative rewards programs. These cards might provide you with a cash-back bonus at certain times of the year. They might let you earn free airline miles. Others will provide you with points that you can cash in for hotel stays, airplane reservations or retail merchandise. Also, these rewards cards often come with interest rates that are far lower than those offered by store credit cards.

The pros

If you pay off your balance each month, store credit cards might not be a bad financial decision. That is especially true if you sign up for a card with a retailer where you spend a steady amount of money each month. Store credit cards often offer discounts on store merchandise, something that can save you money ... as long as you do not keep a balance each month.

Store credit cards might also be an attractive choice for consumers with no credit histories or bad credit. It is easier to qualify for retail credit cards. You can then use these cards to demonstrate sound financial behavior -- paying your credit-card bills on time. This practice will gradually help you rebuild damaged credit or establish a credit history if you do not yet have one.

Before accepting your cashier's offer for store credit, make sure to consider your financial habits and credit status. In most cases, you'll find that a retail credit card does not make sound financial sense.