Establishing new, positive, and properly managed credit is a must for any consumer who wants to rebuild credit scores after making some bad credit mistakes or filing for bankruptcy. However, qualifying for new lines of credit is much easier said than done. Retail store credit cards can help.
If you start applying for every credit card you find on the Internet, it’s going to be a terrible waste of time and you’ll end up damaging your credit with all of the inquiries that will end up on your reports.
While it’s unwise for a post-bankruptcy consumer to begin applying for credit indiscriminately, that doesn’t mean there are no credit card choices out there.
To the contrary, credit card issuers are at the very least intrigued by the notion of extending credit to someone who just filed bankruptcy, and who is also completely out of debt. Retail stores are among the most aggressive card issuers, and are more likely than other lenders to extend you credit.
How Retail Store Cards Work
Retail store credit cards are similar to traditional unsecured credit cards in many ways, but there are a few significant differences.
Like regular credit cards, a retail store credit card has a preset spending limit and does not require a deposit to open the account.
Retail store credit cards differ from regular credit cards in that you are only able to use the card within the chain of stores you opened it with. That means you are limited in your ability to use it–you can’t use just one retail store card to fill up your gas tank, buy groceries, pay for a hotel room, and charge dinner.
Benefits of Retail Store Cards
It’s usually very to qualify for a retail store credit card, even if you have credit problems. This ease of approval is probably the most attractive “benefit” for the post-bankruptcy consumer.
Once you are approved for the account it will likely end up on all three of your credit reports, which is what you’re after when you’re trying to rebuild your credit.
Retail store credit cards are easy to qualify for because they carry a low risk for the bank that issues them. While a low risk card is a big plus for them, it means that the terms are much less attractive for you as the customer. Specifically, these cards come with very low credit limits and high interest rates, making them less than ideal as your regular payment method.
The low credit limits make the account much more difficult to manage. Credit scores don’t like to see balances that consume too much of the card’s credit limit, and that’s easy to do with a retail store card.
A $125 balance on a credit card with a $20,000 credit limit is meaningless, but the same balance on a card with a $250 limit is problematic.
Interest rates on retail store credit cards are also much higher than general use credit cards, like Visa and MasterCard. Rates on retail store cards are commonly in the mid to high 20s, regardless of how good or bad your credit scores are.
That’s about 10 to 15 percentage points higher than the average interest rate on a general use credit card. If you plan on carrying a balance from month to month, it’s going to get very expensive.
If someone were to describe a card with a low limit and a high interest rate you would probably think they were describing a subprime credit card, and you’d be right. Retail store credit cards have very similar terms to subprime cards, which is why they are a double-edged sword. They’re easy to get but they can be problematic to use.
Getting a retail store credit card is a good first step in your credit rebuilding strategy, but it can get you right back into hot water if you don’t use it wisely. As you open new credit accounts and manage them properly, you will be able to qualify for higher credit limits and lower interest rates.