Store Credit Cards and Bad Credit

by Odysseas Papadimitriou on October 23, 2010

store-credit-cards-for-bad-creditYou’d think that Best Buy and Target would be some of the last places you should go if you are trying to improve your credit, especially for you shopaholics who cannot be in a store without going on a shopping spree. Oddly enough, however, store-affiliated credit cards can be a very valuable tool for building or rebuilding your credit.

Before going in depth into the reasons why store cards are useful you must first understand the basic concept behind improving credit with a credit card. No matter if you have bad, damaged, limited or no credit, you need to infuse your credit report with a pattern of positive information to either dilute the impact of past credit negatives like bankruptcy and delinquency or to build from scratch. Though the extent of positive information needed depends on your specific credit situation, this concept is the general basis of credit improvement. Likewise, depending on your circumstances secured credit cards and general-purpose unsecured credit cards (VISA/MasterCard) for bad credit are the usual suspects when it comes to credit improvement credit cards. Undoubtedly secured cards are the cheapest and most disciplined way to rebuild your credit, but if you want to begin adding positive information to your credit report immediately and do not have the cash for a secured card’s security deposit, your options lie in the realm of unsecured credit cards. It is in this context that store-affiliated credit cards—like the Best Buy Credit Card—play the role of the proverbial dark horse.

Store credit cards can prove to be an excellent resource for people with bad or limited credit history because they generally have lower fee and APR structures than the comparable general-purpose unsecured credit cards. All credit cards for people with damaged or no credit have some sort of inherent protection for the issuer against default by what could be viewed as a risky clientele segment. Secured cards have a refundable security deposit that serves this purpose and unsecured credit cards have high APR and fee structures.

So why are store-affiliated credit cards less expensive than their non-store-affiliated counterparts? Store credit cards have lower fees and APRs than do general unsecured credit cards because they can only be used at the particular chain of stores they’re linked to. The reasoning behind this is that stores issue these credit cards so you’ll purchase their goods and drive up overall sales. Stores sell their goods at higher prices than at which they purchase them, meaning any increased buying at the stores derived from their credit cards provides financial cushioning that covers defaults and justifies approval of consumers with bad credit. Essentially the increased sales are worth it for stores to give credit to people with poor or no credit history.

However, purchasing is not required with store credit cards and you can benefit from their credit-building ability without actually buying anything. In fact, it is not necessary to use any credit card in order to see credit improvement. You merely need to open the card and keep it at zero balance and in good standing for positive information to be relayed monthly to your credit report. In not using your store-affiliated credit card, you are ultimately garnering the advantages of the card’s lower fees without playing into the store’s justification in offering them in the first place.

Still, you must understand that you are not guaranteed approval for a store-affiliated credit card, and it is extremely important that you do not decide to simply apply until you are approved because creditors view numerous applications negatively. Therefore, if you are declined by three major-store credit cards, stop applying and wait until you have the money for a secured credit card. In fact, a secured credit card is most likely the better overall option for building credit. However, should you decide you want to pursue an unsecured card, realize that store cards represent a great option.

Disclosure: CardHub.com, is owned by the same parent company as this blog.

Discussion

My Per Fin Jour
Great idea! I've heard of using secured credit cards to improve credit, but have never heard of the benefits of using store cards! Nice!
December 25 at 15:28 pm
Bob
hmm - good idea - I will give a try till I get my $200 security deposit for the Orchard Secured Card
October 23 at 21:45 pm

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