Some Pros and Cons of Retail Credit Cards

Retail or store-branded credit cards are often the go-to credit card for people who are just starting out with credit or people trying to rebuild a bad credit score. Even if you’re not on the market for a new credit card, you’ll be asked to sign up for some retail card almost every time you go shopping. While sales clerks will try to entice you to apply with promises of 10% to 15% on-the-spot discount, be aware that these cards are usually a less-attractive option.

Retail credit cards are most notorious for their high interest rates. CreditCard.com’s 2010 survey of retail credit cards revealed that 19 of 36 surveyed credit cards had APRs close to 25% - which is significantly higher than the current average of 14.98%. The high interest rate on retail credit cards makes them unattractive for carrying a balance beyond the grace period because you’d be paying much higher finance charges than you would on a card with a lower rate. And the higher interest would cancel out any discounts you get from using the card.

Another negative feature of retail credit cards is the low credit limit. Retail credit cards often come with an initial credit limit of $300 or $500, which doesn’t give you much room for making purchases. Considering you should keep your credit card balance below 30% of the credit limit, you’d charge a maximum of $150 on your card. The good thing is that if you stick to that rule, you’ll have a balance that you can comfortably pay in full every month. And many credit cards grant automatic credit limit increases as you make purchases and timely payments.

On the plus side, most retail credit cards come with their own rewards program that lets you earn coupons or discounts once you accumulate a certain number of points. But, the rewards are very inflexible since you can only redeem them at the retail store that issued the reward. Furthermore, you have to use your credit card to redeem the reward. If you’re signing up for a retail credit card, chances are earning rewards are last on your agenda.

Unless you get a co-branded retail card, that is one that’s branded with a major credit card network (Visa, MasterCard, Discover or American Express), you can only use your card to make purchase in that store. Co-branded retail cards can be used anywhere that network’s credit card is accepted, but you’ll need better credit to qualify.

While retail credit cards have some drawbacks, they have their place in the credit industry. If you’re trying to build or rebuild your credit score, a retail credit card is a cheaper option than a secured credit card. Most retail credit cards lack an annual fee and don’t require a security deposit. Those two factors make them a good starting place.