When you are shopping in a department store or a large national retail chain you will almost certainly be offered the chance at some time to apply for a credit card that is offered by the store. If you open a new account, you are told, you will obtain a discount on your purchase and possibly the chance to earn future rewards.
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Understanding how the cards work
Here are tips from myFICO, the consumer division of FICO—a data analytics company based in San Jose, Calif. which develops credit reports and provides alerts from all three credit bureaus—to help you understand the cards and how they can help or hurt you.
How the cards can help you build up your credit score
In many ways store credit cards operate in the same way as regular credit cards. A major similarity is that both have the potential to help you build your credit rating.
In most cases a bank issues the retail card which is then issued with the name of the store on it. In most cases you will be able to use the card only with a set number of retail outlets but in other cases you might be able to use it more widely.
If the bank that issues the card reports your account information to the major credit bureaus the account will appear on your credit report. If that takes place, the card will give you the chance to build up your FICO score as long as you use the card wisely.
Checking your credit
When you apply for a new credit card, such as the retail store card, the bank that issues the card will almost certainly review your credit report before it issues you with the card. In some cases, the credit inquiry itself can lower your FICO Score, according to myFICO. FICO Scores will consider only hard inquiries that take place in the previous year, however, and some inquiries will have no impact on your FICO Score at all.
In any event, applying for new credit will have only a small impact on your overall FICO Score. In most cases it will result in fewer than five points being taken off your score.
Avoid these mistakes
It is essential that you manage your account carefully. Always bear in mind that the way you handle your retail credit card can influence your credit score just as much as any other credit that you carry. Take care, therefore, that you avoid these mistakes when using your retail store card:
• Never pay late.
Your payment history makes up a third of your FICO score. If the retail store card that is recorded on your credit report shows late payments, it will cause your score to decline.
You can easily forget about the account if you can use the card only at certain outlets. To avoid this happening, set up automatic payments or a calendar reminder to help you avoid incurring late-payment fees and a ding on your credit report.
• Watch your credit limits
Be careful to keep your spending below the credit limit on the card. In addition, be aware that the amount you spend on the card is added to the other credit that you carry. The total amount of credit is calculated as a percentage of your income. If that amount is high, your FICO Score will be harmed.
The credit limit on a retail store card can at times be lower compared with that which is available to you on a regular credit card. You are more likely therefore to run up the credit to the maximum that you are allowed. Doing so might lower your FICO Score as a result.
To avoid this happening, be sure that you do not max out the account. Think about paying your bill early—before the statement closing date—so that a lower balance will be reported to the credit bureaus.
• Pay your balance every month
Interest rates on store credit cards are as high, and in some cases higher, than on other credit cards and other forms of credit. Having a revolving balance on the card might raise your rate of credit use, but it also can cost you a large amount of money. It is best, therefore, to pay your balance in full every month to avoid this additional cost.
The good and the bad
If you are trying to build credit, store credit cards can be helpful. They are also a convenient means of paying for your purchases at your favorite store. You might be able to gain a meaningful discount on an initial purchase. Rewards on the card also would help you with your savings.
The way you manage a retail credit card will determine the main effect it will have on your credit, however. If you fail to pay on time and in full you will incur considerable fees and high interest rate charges. If you pay on time and in full, however, the account could help you build up a positive history of payments and be useful to you in that way.