Are Store Credit Cards Bad for Your Credit Score?

Store credit cards often present attractive discounts at the point of sale. While convenient for immediate savings, these cards raise questions about their effect on an individual’s creditworthiness. Understanding how they interact with credit scoring models is important for making informed financial decisions. The impact of a store credit card on a credit score can be positive or negative, depending on how the card is managed.

Understanding Your Credit Score

A credit score is a numerical representation of an individual’s creditworthiness, used by lenders to assess risk. FICO and VantageScore are two recognized scoring models, both ranging from 300 to 850. These scores are derived from information in your credit reports, which detail your borrowing and repayment history.

Several factors contribute to these scores. Payment history, including timely payments and delinquencies, is the most influential component, accounting for 35% to 40% of a FICO Score. Amounts owed, also known as credit utilization, is another significant factor, accounting for 30% of a FICO Score. The length of your credit history, new credit applications, and the mix of different credit types also play roles in determining your score.

Impact on Your Credit History

Applying for a new store credit card initiates a “hard inquiry” on your credit report. A single hard inquiry results in a small, temporary decrease in your credit score, often by fewer than five points. It remains on your report for up to two years, though its impact on your score fades after 12 months. Multiple hard inquiries in a short period can signal increased risk to lenders and may have a more pronounced effect on your score.

Opening a new account, including a store credit card, also affects the average age of your credit accounts. Credit scoring models consider the average age of all your accounts as part of your credit history length. A new account, starting with an age of zero, can lower this average, particularly if you have a short credit history, potentially causing a temporary dip in your score.

Store credit cards contribute to your credit mix, which assesses whether you can manage different types of credit responsibly. While credit mix is a smaller factor, accounting for 10% of a FICO Score, having a diverse portfolio of revolving credit (like credit cards) and installment loans (like mortgages or auto loans) can be viewed favorably. However, opening a new account solely to diversify your credit mix is not recommended, as the immediate negative impacts from the inquiry and lowered average age of accounts may outweigh the small benefit.

Managing Credit Utilization

Credit utilization refers to the amount of revolving credit you are using compared to your total available revolving credit, expressed as a percentage. This ratio is a significant factor in credit scoring, accounting for 30% of your FICO Score. A lower utilization rate indicates responsible credit management and is associated with higher credit scores. Experts suggest keeping your overall credit utilization below 30%, with those possessing excellent credit maintaining it below 10%.

Store credit cards come with lower credit limits compared to general-purpose credit cards. This lower limit means that even a small purchase can result in a disproportionately high utilization rate on that specific card. For example, a $100 balance on a card with a $200 limit results in 50% utilization for that card, which can negatively impact your score even if your overall utilization across all cards is low. Credit scoring models consider both overall utilization and per-account utilization.

Maintaining a low balance on store cards is important because a high utilization rate on any single card, or across all cards, can negatively affect your credit score. To calculate your utilization, sum all your credit card balances and divide by your total credit limits across all revolving accounts. Paying your balance before the statement closing date can help ensure a lower balance is reported to the credit bureaus, improving your utilization ratio.

Strategies for Responsible Use

Using store credit cards responsibly can contribute positively to your credit profile. Make all payments on time, as payment history is the most influential factor in credit scoring. Setting up automatic payments for at least the minimum amount can help avoid missed payments. Paying the full balance each month is even more beneficial, as it prevents interest charges and helps maintain low credit utilization.

Maintaining a low credit utilization ratio is another important strategy. This means keeping the amount you owe well below your credit limits. With lower credit limits on store cards, it is particularly important to use them sparingly and avoid maxing them out. If you are concerned about overspending, consider using the card only for planned purchases or specific expenses you can immediately pay off.

Consumers should avoid opening too many new credit accounts in a short timeframe. While a new account can eventually help your credit mix, too many applications can lead to multiple hard inquiries and lower the average age of your accounts, temporarily decreasing your score. Focus on managing existing credit lines effectively. Regularly monitor your credit reports for accuracy and understand the terms and conditions of your store card, including interest rates and fees.