Are Store Credit Cards Bad for Your Credit?
Learn how store credit cards affect your credit score. Understand their intricate influence and gain strategies for responsible management.
Store credit cards, often offered at the point of sale, are a type of revolving credit provided by specific retailers or brands. These cards function similarly to general-purpose credit cards, allowing purchases and balances to be paid over time. Understanding how these cards interact with one’s credit profile is important, as they can significantly influence an individual’s credit score.
Understanding Your Credit Score
A credit score is a numerical representation that helps lenders assess an individual’s creditworthiness. This three-digit number, commonly a FICO score, is derived from information within credit reports and reflects how responsibly credit has been managed. FICO scores are primarily influenced by five key categories, each with a different weight:
Payment history (35%): Evaluates whether past credit accounts were paid on time.
Amounts owed (30%): Considers total outstanding debt relative to available credit.
Length of credit history (15%): Assesses how long credit accounts have been established, including the age of the oldest and newest accounts, and the average age of all accounts.
New credit (10%): Looks at recent applications for credit and newly opened accounts.
Credit mix (10%): Considers the diversity of credit types, such as credit cards, installment loans, and mortgages.
How Store Credit Cards Influence Your Credit
Applying for a store credit card initiates a hard inquiry on a credit report, which can temporarily lower a credit score by a few points. This inquiry indicates to lenders that new credit is being sought. While a single hard inquiry typically results in a minor and temporary dip, usually fewer than five points, multiple inquiries in a short period can have a greater impact, as they may signal an increased risk to lenders.
The opening of a new store credit card also affects the length of credit history by reducing the average age of all credit accounts. Even if an individual has a long credit history, adding a new account with a zero-year age will lower this average. This adjustment can have a more pronounced effect on individuals with shorter credit histories or fewer existing accounts.
Store credit cards often come with lower credit limits compared to general-purpose credit cards, frequently starting in the range of $200 to $300. This lower limit can significantly impact the credit utilization ratio. Even a small balance on a card with a low limit can represent a high percentage of the available credit, potentially signaling higher risk to lenders. For example, a $100 balance on a $300 limit card results in a 33% utilization, which is above the generally recommended threshold of 30%.
Maintaining a low credit utilization ratio, ideally below 30% of the total available credit, is important for a healthy credit score. If a store credit card is used frequently and balances are carried, its lower limit can make it challenging to keep this ratio low.
Payment history remains a paramount factor; consistently making on-time payments on a store credit card, just like any other credit account, contributes positively to a credit score. Conversely, missed payments can severely damage a score. While adding a store card can contribute to credit mix, its impact is generally less significant than other factors.
Responsible Use of Store Credit Cards
A primary strategy involves consistently making all payments on time, as payment history holds the greatest weight in credit score calculations. Timely payments demonstrate financial responsibility and contribute directly to a stronger credit profile.
It is also important to keep balances low relative to the credit limit on store cards. Due to their typically lower credit limits, even small balances can lead to a high credit utilization ratio, which can negatively affect a credit score. Paying off the full balance each month, or at least keeping it well below 30% of the limit, helps maintain a favorable utilization.
Understanding the specific terms and interest rates of a store credit card is also a sound practice. While store cards may offer promotional financing, being aware of the regular Annual Percentage Rate (APR) helps in making informed spending and repayment decisions.
Avoiding the temptation to open too many store credit cards within a short timeframe is also advisable. Each application results in a hard inquiry, and numerous inquiries can signal increased risk to lenders, potentially leading to a temporary dip in the credit score.