Is a store credit card right for you?

Pros of using a store credit card in Canada

A big reason to consider a store credit card is that they're usually easier to get than a standard credit card.

Individuals with low credit scores or no credit history have a better chance of approval, and these cards provide a way to establish or improve credit.

Additionally, store-branded credit cards often include benefits such as early sale notifications, cash back, coupons, or a points system that can be valuable. This makes store credit cards a potentially better choice for those with low credit looking for rewards, compared to prepaid or secured credit cards.

Considering these benefits is worthwhile if you frequently shop at the store, as you could save significantly over time. However, to truly take advantage, it is important to be sensible, maintain a low balance, and pay off your full balance monthly.

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Cons of store credit cards

Many store credit cards are known to come with exceptionally high-interest rates, sometimes as much as 5-7% higher than those associated with regular credit cards. This means that if you tend to carry a balance from one month to the next, you should be prepared to face significant interest charges that can accumulate over time, making it more expensive to pay off any outstanding debt you might have on those cards.

In addition, it is typically the case that a store credit card will offer a relatively low credit limit. This situation can be problematic for consumers, as having a high credit utilization rate—meaning the amount of credit you are using compared to your total credit limit—can have a detrimental effect on your overall credit score. Maintaining a healthy credit score is important for future borrowing.

For instance, if your credit limit is set at $1,000 and you happen to charge $500 to your card, you are utilizing 50% of the available credit. Financial experts commonly advise that it is wise to keep your credit utilization ratio below 30%. By staying under this threshold, you can help safeguard your credit score from potential damage that could arise from higher utilization rates.

Lastly, when you submit an application for a store credit card, you might receive an immediate approval from the retailer, which can initially feel reassuring. However, it is important to note that the financial institution that is supporting the card may perform a more thorough review of your credit history. This could involve pulling your credit report, and if you have multiple such inquiries on your record within a short period, it may negatively impact your credit score. Keeping these aspects in mind can help you make more informed decisions regarding store credit cards.

Is a store credit card right for you?

Ultimately, the key takeaway is this: If you anticipate that you might end up with a hefty balance on your account, then a store credit card is not for you! Try looking for a low interest credit card instead.

On the other hand, if you believe you can consistently pay off the balance in full and have the opportunity to earn substantial cash back or other valuable rewards from a retailer that you frequently shop at, then it could be worthwhile for you to think about applying for one of those cards.