Personal Finance

The Cons of Retail Credit Cards

By John Ulzheimer, Guest Columnist

When you're doing your holiday shopping, expect retailers to throw you discounts as high as 20% if you are willing to apply for a store credit card. On the surface this sounds like a no-brainer. You open a new retail store credit card, save 20% on your purchases and move on your merry way. But, when you deconstruct the process and the product, you might just realize that you've made a very bad decision.

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Retail credit cards can lead to lower credit scores. When you apply for a retail store card you are essentially applying for credit, albeit in a very unsophisticated manner (at the register with a line of other shoppers behind you). And when the retailer pulls your credit reports and credit scores, it will leave behind a breadcrumb called the "credit inquiry." Multiple inquiries for your credit reports in a short period can trim your score, especially if you don't have many credit accounts or you have a short credit history.

Add to that the fact that low credit limits make it much easier to run up a higher credit-utilization ratio (the amount of debt you have relative to your credit limits), another way retail cards can lower your credit scores. For example, a modest $250 balance on a card with a $500 credit limit means a 50% credit-utilization ratio -- not good. The same balance on a general use credit card with a modest $5,000 credit limit is an almost meaningless 5% credit-utilization ratio. (Editor's note: Kiplinger recommends spending no more than 30% of your revolving credit card limits.)

This means even if you carry modest balances for just a few months, you'll easily throw away any discount realized when you opened the card. And if the prospect of turning a $200 pair of boots into a $280 pair of boots doesn't persuade you to steer clear of retail cards, maybe the damage you'll cause your credit scores will.

Retail credit cards are subprime credit cards. Would you apply for a credit card if you knew that the interest rate was going to be well into the 20% range? Would you apply for a credit card if you knew that the credit limit was going to be below $1,000? Well, if you've applied for a retail store credit card, that's exactly what you've done.

In the non-retail credit card world, credit limits below $1,000 and interest rates in the twenties are generally reserved for consumers with poor credit, so-called subprime borrowers. Yet, they're status quo in the retail credit card world. Their poor terms are extended even to applicants who have killer credit scores.

Keep these things in mind the next time you take a trip to the mall and the cashier tries to persuade you to apply for a store credit card. Whip out a Visa, Discover, MasterCard or Amex for your purchase and don't use your credit report as a discount coupon!

Follow John Ulzheimer on Twitter .

John Ulzheimer is the president of Consumer Education at, the credit blogger for, and a contributor for the National Foundation for Credit Counseling . He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO and Equifax, John is the only recognized credit expert who actually comes from the credit industry.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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