In-Store Credit Cards & Your Credit Score

We’ve all heard the seductive proposition before: “Would you like to sign up for our [insert name of store here] credit card and save 20% on your purchase today?” Whether you’re at Express, Dillard’s, or even Home Depot, you will probably get ambushed with this line. At first, it might seem like a fairly decent deal—you can take the discount, pay the card off in full at the end of the month, and then never use it again, right? For most consumers, that is the allure, but it’s a far cry from reality. Few people realize that department store credit cards are a different type of credit from conventional cards and thus impact your credit score differently. In fact, in-store credit cards sometimes hold more perils than perks when it comes to your credit for a host of reasons that we will explain in what follows.

Department Store Cards: A Different Breed

FICO, the company that calculates credit scores, does not view department store credit cards in the same way as it does traditional cards like MasterCard, Visa, Amex, and the like. In-store cards are considered a unique type of credit, just as installment loans also have their own category. So, in a way, having one or two department store credit cards might actually help your score because it diversifies your credit mix. However, the diversity of your credit mix only accounts for a paltry 10% of your credit score, which may not be worth the accompanying risks. One thing to note is that many department store cards are now affiliated with major national banks, such as the Target Visa, and thus do actually function the same as any other Visa or conventional card would.

How In-Store Cards Can Hurt You

In-store credit cards pose three main dangers to your credit score that we have summarized below:

1. Having too many. Department store credit cards can hurt your credit if you carry too many or apply for several in rapid succession. Like any form of credit, if you have too many outstanding accounts or apply for too much new credit in a short period of time, it makes you look desperate to lenders, which means you become a poor credit risk.
2. The cancellation temptation. You might be tempted to sign up for the card for the enticing discount, pay it off, and then cancel the card when you’re done. Generally, this is not a good idea because canceled accounts typically have a negative impact on your credit score. Especially with in-store cards you’ve had for a while and on which you have a good payment history, you might lose several points on your score if you cancel them.
3. Sky-high interest rates. It’s not uncommon for department store cards to carry interest rates as high as 28%. This is clearly what enables retailers to afford to dangle the first-purchase discount in front of shoppers—you might save $10, but they will likely earn hundreds, if not thousands, of dollars in interest payments. Therefore, department store credit cards can wreak havoc on your credit score and your overall debt levels if you fail to pay them off in full each month. More often than not, the pittance of a discount is just not worth the money you might end up shelling out in interest payments later on.