How Store Credit Cards can Negatively Impact your Credit Score

There is no doubt that stores do a hard sell with their own credit cards. They encourage their employees that often have little understanding of the product, to foist them off on shoppers. The tempting allure of an instant discount or the perceived cachet of a branded card can lead to harried consumers signing on the dotted line without perusing the terms and conditions attached.

Signing up for store cards can have a negative impact on credit scores though, and consumers need to be aware of the implications. A good credit score is essential, yet store cards can be pushed onto youngsters who have little understanding of the impact.

Applying for most kinds of credit leaves a hard inquiry on credit reports. Applications for credit cards, store cards, loans and mortgages will all result in an inquiry which will in itself reduce credit scores by an average 10 -20 points. The situation is exacerbated if a lot of credit is applied for within a short time frame, so consumers should be wary of signing up for every store card on offer which gives an initial purchase discount.

Store cards typically carry higher than average interest rates which may be of no consequence if the balance is paid off in full each month. The problem which store cards have is the low credit limits which eat into the credit utilization rate which credit scoring models put a lot of stock in. Ideally consumers should use no more than 30 percent of their available credit, but low limit credit cards tend to make it easy for consumers to spend above this figure.

Even if a store card is paid off in full by the due date it will still send signals that credit is being ‘maxed out’ if a higher proportion than 30 percent of available credit is used. Naturally any initial discount is soon wiped out if the balance is not paid in full and exorbitant interest rates are applied to the balance.

It is possible for store cards to serve to improve ones credit score or help to build a credit score, but secured credit cards offer a better option. They are very easy to obtain as the credit scoring criteria is lower than general credit card applications.

To use a store card to improve or establish credit then only a small amount should be spent via the card on a monthly basis, ensuring that the maximum spend is no more than 30 percent of the credit limit. The card issuer may then choose to increase the credit limit which in turn allows for higher spending without credit utilization rates being affected.

A wallet full of store cards is not a good indication for a top notch credit score and consumers should be careful not to sign up for every offer. If a store card has a particular appeal then it is best to wait until an excellent discount on a needed item is available, ensuring that the item in question does not exceed the credit utilization rate. The application, whether accepted or rejected, will show on credit reports for twelve months.