With the credit industry in lock-down mode, a lot of people starting out in credit are finding it difficult to do. Where once I had a few first-timer credit cards I could recommend, I’m now learning from clients that these companies are not really accepting newbie credit. It’s turning into a catch-22. You need credit in order to get credit, but how are you supposed to get credit if no one will give it to you? To that end, I’ve had to suggest department store cards.
I’m not a big fan of department store cards overall; however, when it’s the only form of credit you can get, you have to start somewhere. So, with that in mind, I figured we could look at the pros and cons for having a department store card.
- When used responsibly, they can help build credit.
I stress the word responsibly here, but traditionally speaking, because department store cards have been a little easier to get for those just starting out, it is a good card to help establish credit. However, this shouldn’t be a long term option.
- You can save money through card discounts.
The hook for department store cards is that most will offer you 10-20% off your first purchase if you’re approved. Now, it’s important to be careful that you don’t go overboard with this; however, if you were planning to spend the money anyway, getting a discount is always a good thing.
- Membership benefits.
Some retailers have membership programs with their cards and if you shop there frequently, you could rack up coupons or points to use towards purchases.
- Hard hit against your credit.
This is true of any hard inquiry into your credit, even major credit cards, but since department store cards are not usually a long-term option, dropping your score up to 30 points seems excessive, especially if you’re not planning to use the card or the department store.
- High interest rates/short grace period.
The rates on these cards are fairly high, and for someone new to credit who hasn’t yet learned to be responsible, this can cause long-term damages. Not to mention the fact that these cards come with very little grace periods, so they are good at catching people on the interest, even if someone usually pays the card off every month. The best way to avoid problems here is watch what you spend and pay it off on time, every month. Read the terms and conditions and know what is expected of you.
- Many are backed by finance companies.
One of the reasons these are sometimes easier to obtain is that many are backed by finance companies – the same kinds of companies that offer shark loans to people who are in desperate need of money. Seeing finance companies on a credit report is a concern for most lenders, especially when there is no indication that the finance company is backing a department store card. This is because finance companies usually indicate there is financial trouble in an individual’s life and they are in desperate need of a loan.
Most credit files now show the department store with the finance company; however, not all of them have that notation. When the department store is unidentifiable, lenders will be more cautious just because of the finance company.
Overall, I still don’t like department store cards because of the high interest and the fact that the promise of 10-20% off lures people into buying more when they take advantage of the offer, often getting them into trouble. That said, with economic conditions changing, I think the responsible use of these cards can effectively help establish a credit file.
What do you guys think of department store cards? Are they a good practice for someone starting out on their financial journey? What would you recommend to someone just starting out?