What Is a Retail Credit Card & How Does It Affect Your Credit Score?
Jul 22, 2022 7 min read
- Retail cards are similar to traditional credit cards but are issued by a retailer.
- Managed wisely, retail credit generally has easier approval terms, offers shopping perks and could help build credit.
- Limited use, higher interest rates and lower credit limits are among important downsides to understand.
We’ve all probably heard a cashier at the checkout line ask if we’d like to open a store credit card and get an automatic discount applied to this and future purchases. The offer may sound like a good deal, but is it?
The opportunities for retail cards are immense and they may be useful tools in certain cases. But it’s important to understand the pros and cons of applying for and opening such accounts — and to consider their impact on your credit score and your ability to get other credit you may need.
What is a retail card?
Retail cards are currently the most common type of retail credit that consumers use. Stores typically partner with banks to offer these specialty credit cards to customers who are frequent shoppers, and they may give discounts, rewards or perks for that loyalty. And, by having its own credit card, a store can avoid paying fees to process transactions on other credit cards.
Retail credit cards are also known as store cards, because they can often only be used for purchases at the store (or group of retailers) that offers them. These types of credit cards come in two flavors: closed loop and open loop. Closed-loop cards can only be used at the retailer that issues them; open loop cards are often co-branded with other retailers or major credit card issuers — increasing the number of places that accept them for purchases.
Can retail credit cards hurt your credit score?
Retail cards could either help or hurt your credit score, depending on how you use and manage them and how many new retail credit cards you apply for. The effect really mirrors that of traditional credit cards. And retail credit cards that report to the three major credit bureaus can influence your credit score just like any other credit obligation.
Most of the time when you apply for a new credit card of any type, a copy of your credit report will be reviewed, and a hard inquiry triggered. Multiple hard inquiries in a short period of time can affect your credit score and make you appear to be a higher risk borrower to lenders.
Retail credit card utilization
Because they’re a type of revolving credit, retail credit cards are included in your overall revolving credit utilization — the measure of how much of your available credit you’re using. The utilization of revolving retail accounts is also looked at on its own, and higher utilization rates may hurt your score — even if your overall revolving utilization is low.
Amount of debt
The discounts, sale previews, loyalty rewards or promotional terms that often accompany retail credit card offers are meant to spur spending, and that could lead to added debt that becomes harder to pay off each month.
Age of credit
Each new credit account you open lowers your average age of accounts, which is one of the top factors used to determine your credit score. So, if you open a new retail credit card in a snap decision at the checkout counter and are approved, your credit age (and possibly your credit score) will decrease.
What are the pros and cons of retail credit cards?
Retail cards can have advantages and drawbacks, so it’s important to give them careful consideration. Here are some positives and negatives about retail credit cards.
Easier approval. Store credit cards might be easier to qualify for than traditional credit cards if, say, you’re new to credit or have some credit blemishes. In that way, and with responsible use, they may help you build credit just like any other credit account — and add to your credit mix.
Sign-on perks. Retailers may offer upfront one-time perks like 0% interest or a discount on your current purchase in order to entice you to open a retail credit account on the spot. But that doesn’t mean that it’s a wise move to apply on impulse — without thinking about how it will impact your finances over time.
Ongoing deals or discounts. Retailer credit may offer cardholders discounts, exclusive benefits and access to sales that aren’t available to regular customers. If you pay your monthly balance in full and avoid interest charges, a retail card account may save you money on what you buy. But you’ll want to compare the value of the savings you get with the effect on your overall credit situation and finances.
Limited use. Retail credit cards can be a convenient way to pay for purchases at a retail store you like and shop with often. But store cards can’t be used everywhere, which limits your options.
Higher interest rates and fees. While interest rates for regular credit cards currently average 16.59%, the average rates for retail credit cards are typically much higher at 24.35%. What’s more, some retailers defer interest during the promotional period, but that means if you can’t pay off the balance in full before the promo ends, you’ll have to pay all the interest that accrued from the original date. Retail credit terms may also charge higher fees for late payments.
Lower credit limit. Credit limits can be lower on retail credit cards vs. general credit card accounts. And with a lower credit limit, it can be easier to use a larger percentage of available credit. This could cause your credit utilization rate to rise.
What are the different types of retail credit?
Retail financing is a point-of-sale installment loan that spreads out payment for a large purchase in installments, over time. Instead of relying on a credit card or other form of financing, the retailer directly connects the customer to its lending partner to apply when they’re buying. Retail financing is most often used for big-ticket items, such as electronics, major appliances or home furnishings.
Buy now, pay later
Buy now, pay later (BNPL) is a newer retail credit method that has sprung up fast. It’s a type of short-term financing that allows a small deposit upfront and then a series of interest-free payments after. It’s kind of the new version of the layaway plan of the past, but customers get the product right away and pay for it later in scheduled payments — usually between four and six — from a debit or credit card. Affirm, Afterpay and Klarna are just a few BNPL players.
Rent to own
Rent to own is another type of retail credit financing plan that lets you pay for use of the purchase as you pay it off — with either low monthly payments for a long time, or higher payments for a short time. Stores that offer rent to own could have different payment plans and terms that need to be carefully reviewed. For instance, if you choose lower payments for a longer time, you’ll likely pay more to buy than the retail price of the product in the end.
Weighing the upsides and downsides of retail credit cards
Retail credit cards can be helpful if you’re trying to build a credit history, and they could be a convenient way to pay for purchases at stores you visit often. In some cases, you might even earn rewards on your spending that you could earmark for future savings.
But just like any other type of credit account, a retail card is a form of financing that requires prudent management. So, you’ll always want to consider the impact on your credit score and your ability to get the future credit you need.
Frequently asked questions about retail cards
What is the difference between a retail card and a traditional credit card?
While they’re used in much the same way, a retail card can only pay for purchases at a specific retailer or chain of stores. A traditional credit card from a major issuer can be used much more widely.
Are retail cards easier to get than traditional credit cards?
In some cases, yes. Retailers’ qualifications for approval may be less stringent because they want to encourage shoppers to use their cards and stay loyal to their brand.
Does opening a retail card hurt my credit score?
In the short term, opening a new retail card could cause a temporary drop in your credit score. When you apply for any new credit that prompts a credit inquiry, it may bring down your score for a few months. Adding a new retail card may also reduce your score a bit because it decreases the average age of your credit accounts. On the other hand, opening a new retail card will increase your overall credit limit and provide another account for you to build a record of on-time payment history — a plus for your credit score.
When should I consider a retail card?
As with any credit decision, you should consider it carefully. To make the right choice for you, think about your current credit situation — do you already have access to traditional credit cards with better terms and rewards? Or do you need to build up your credit record and shop at this favorite retailer often? It’s not usually a good idea to buy things you don’t need just for the purpose of building your credit. But with a commitment to on-time payments (to avoid the higher interest rate that retail cards typically charge), a retail card could help establish a positive credit history and increase your credit score.
About the author
Nathan Foley questions everything — and thinks you should too. As Elevate’s resident mathematician, he pores over datasets to find the truth amid the fluff and translates insights into ideas for improving personal financial resilience.