The pros and cons of department store credit cards

Chances are, a cashier at a retail store has asked whether you’d like to get a credit card from that store.

To tempt you to sign up on the spot, that cashier might dangle a special offer — for example, 30 percent off regularly priced merchandise — if you’re instantly approved for the store’s card.

But should you take up that offer? The answer depends, in large part, on what your credit history is like and how responsible you are with credit.

What types of store credit cards are available?

First, let’s cover the two types of department store, or retail, credit cards.

One type of retail card looks just like a regular credit card, but you can only use it to buy goods and services from that retailer. That’s unlike a traditional credit card, which can be used wherever a merchant accepts cards.

The other type of retail card bears the name of a retailer, but the card can be used at other locations as well, not just at that specific store.

Pro: Department store credit cards can be a financial tool.

“Store credit cards can be a wise financial tool when you understand their pros and cons,” says personal finance expert Laura Adams, host of the “Money Girl” podcast.

But the card is a wise tool only if you can demonstrate financial responsibility, which includes making regular payments on time. Payment history is a key factor in determining your credit scores.

For someone with not-so-great credit or no credit at all, a department store credit card can be a decent path for building credit. Why? Consumers who have trouble opening a traditional credit card because of their credit may find it easier to be approved for a store credit card.

Broadly speaking, issuers of store credit cards have looser standards for approving an applicant than issuers of standard credit cards do. That can make store credit cards appealing to people with credit scores below 700 — those who are trying to build or rebuild their credit.

Credit consultant Julie Marie McDonough, author of “How to Make Your Credit Score Soar,” calls retail cards the “training wheels” of credit. That’s because when you use a store card, your payment history and other details are reported to the credit bureaus and contribute to creating a credit history.

You can also benefit from a card’s perks, such as earning rewards from the retailer’s loyalty program, special discounts or advance notice of promotions or sales.

Con: Department store credit cards can also lead to financial trouble.

Department store credit cards typically have higher annual percentage rates (APRs) than traditional credit cards do. This means if you don’t pay off the balance on your department store credit card every month, you’ll accrue interest payments that are higher than those you’d normally find with a traditional credit card.

However, if you do pay off the balance on time every month on a department store card, you won’t rack up interest payments.

“Just don’t go overboard and spend more than you should by jumping on every ‘savings’ opportunity that a store credit card offers,” Adams says.

Also, since retailers regularly seduce consumers with credit card sign-up bonuses, it can seem alluring to apply for several store cards during one trip to the mall. But that could spell trouble as well. When you apply for credit, the retailer — or, more accurately, the bank that issues the retailer’s card — performs a hard inquiry. Having too many of these inquiries can signal you’re a higher-risk borrower, which can lower your credit scores.

Fortunately, it can be harder to go overboard with a store credit card, as this kind of card often comes with a lower credit limit than a regular card does. But there’s a catch here: Being at or near the limit on a card can bump up your credit utilization ratio and possibly lead to a dip in your credit scores.

Who should get a store credit card and who shouldn’t?

So, Adams says, a store credit card is “a poor choice when you typically charge a lot or need to carry a balance from month to month.”

As noted by Consumer Reports, if you fail to pay your monthly balance in full, “the interest you’ll be charged could wipe out the discount you got for signing up for the card.”

However, Adams says, a store credit card can be a smart choice if you regularly make purchases from a retailer such as Amazon.com or Costco — and you pay off the balance on time and in full every month to avoid accumulating interest.

Bottom line

As with any credit card, you should carefully study the terms and conditions if you decide to apply for a store card. Pay close attention to the APR, and make sure you’re comfortable with that interest rate.

The perks that come with a store credit card can sound awesome at first. But they might not be so awesome if you’re struggling to pay off the full balance every month and are hit with high interest charges.