The winter holidays are fast approaching. Before you know it, your favorite stores will be ramping up their sales pitches and marketing efforts to get customers to sign up for their store credit cards at the till or online. The best store credit cards tempt shoppers with their amazing discounts and a chance to build their credit history. Many stores offer holiday credit cards without any annual fee as a further enticement, but don’t forget that the cards also come with some drawbacks.
Apply with Low or No Credit, but Take a Hit to Your Credit Score
Store credit cards like Sobeys or Graceway can be very good credit cards for bad credit and for shoppers with low or no credit history. They generally offer low-credit credit cards with few barriers to acceptance. Consumers whose credit history is too thin to qualify for an ordinary credit card can frequently still be approved for a store-linked credit card. If you use it wisely, a store card can improve your credit score, which helps you to succeed at building credit.
But, even careful consumers can find that holiday credit cards do more harm than good to their credit score. Each time someone opens up a new card, the company performs a credit check, which remains on file. Opening up too many cards within a short amount of time (like just before the holiday season) increases credit utilization and the number of hard inquiries on a credit report. Each hard inquiry is estimated to ding about 10 points off a credit score.
A further risk is that credit cards from stores generally have low credit limits, which are easy to exceed. If you frequently max out credit cards, it will negatively affect your credit rating, even though the cards in question could have limits of only a few hundred dollars.
One alternative is to use a Secured Credit Card, such as the Home Trust Secured Visa. It’s very hard not to be accepted for a secured credit card, no matter how poor your credit. These cards require a security deposit, which matches the card’s credit limit and will be used to pay off the card if you choose to cancel. This way you can improve your credit score while avoiding the negative impact of having too many credit inquiries in a short period.
Great Sales and Perks, but Limited Flexibility
The main reason why shoppers open store credit cards is to take advantage of the sales and perks that the stores offer. For example, Sobeys tempts you with 2 Air Miles for every $20 you spend, Lowe’s Canada offers free delivery and interest-free payments, and Costco offers cash back on purchases at gas stations and restaurants as well as in-store. Nordstrom and Hudson’s Bay cards let you earn points toward store gift cards, while the Wal-Mart credit card brings regular discounts.
All these perks can be tempting, but before you bite, you should check out regular rewards cards instead. For example, the Scotia Gold Amex offers 4% cash back on all gas, grocery, dining and entertainment purchases, while the SimplyCash Preferred Card from American Express includes cash back (2%, unlimited) on any and all purchases. Unlike holiday credit cards, these perks are available all year round.
Aside from their greater flexibility, regular rewards cards carry slightly lower interest rates of around 20% APR in place of the usual store credit rate of around 25%. Finally, regular rewards and cash back cards almost always come with a raft of travel cover, extended warranty, and insurance policies that are often missing from store credit card options.
Low or No Annual Fees, but for How Long?
Another plus for store credit cards is their low or no annual fee offer. A store’s no fee credit cards are definitely attractive, but be aware that they often introduce or raise the annual fee after the introductory period ends. Some regular credit cards come with no annual fee, applicable beyond a brief promotional period. One great example is the PC Financial World Elite Mastercard, which is fee-free and gives the equivalent of 3% cash back in free groceries at Shoppers Drug Mart, Loblaw, and Pharmaprix stores.
Value All Year Round
Although stores advertise their credit cards with tantalizing offers during the holiday season, savvy consumers will recognise that these offers are going to be a lot less appealing once the season ends. Instead of potentially damaging your credit rating and opening yourself up to over-spending, consider choosing just a few regular credit cards that you’ll use long after Boxing Day.