When Should I Open a Retail Store Credit Card?

When you make a purchase at a retail store who issues their own store branded credit card the clerk often tries to encourage you to open a new account.  You are usually offered a discount for everything you purchase that day, normally between 10% and 20%.  As enticing as this might seem, you need to be aware of the impact on your credit and the downside to retail store credit cards.

If you are trying to build credit, retail cards are usually the easiest to obtain. These cards almost always charge you higher interest rates and give you a low credit limits, regardless of how good your credit happens to be.  I refer to them as sub-prime cards with a store logo, because of the low limits and high interest rates.  Retail cards are also not very versatile, since they can normally only be used at one chain of stores.  For frequent shoppers at the chain, however, these cards can be attractive because of the rewards and discounts.

You shouldn’t apply for several of these cards in a short time frame.  It can have a negative impact on your credit scores.  You get two strikes against you in your credit score when you open a new retail account – it impacts calculations regarding new accounts as well as inquiries. You’ll have a retail store inquiry (one of the most damaging types) on your credit file, which is considered in your score for the next 12 months.  And you’ll have a new account added to all of your credit reports, which reduces the average age of your overall credit file.  Both of these can reduce your scores.

The impact varies depending on how long you have had credit and your number of accounts, among other things.  Opening one account will reduce your score, but not as much as opening several in a short time frame.  If you have had several accounts for many years, this new account won’t have as much an impact. But if you have only a few accounts, and they also happen to be relatively new, then opening the new card/s will have a larger negative impact.

My preference is to avoid opening retail cards.  I prefer bank issued cards such as MasterCard, Visa, American Express or a Discover card for retail purposes.  I know there are some of you that like the perks on the retail cards.  So if you must, don’t accept them very often and pay them in full.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.