When it might make sense to get a store card

By Emma Lunn

Store cards have come in for some bad press over the years, and financial experts generally warn consumers against taking one out. But are they always a bad idea? Does it ever make sense to say, "yes," to the clerk's sales pitch at the till?

The case against store cards
Store cards have been roundly criticised for luring in customers with tempting discounts and then slapping them with higher-than-average interest rates and low credit limits.

The controversy has resulted in increased regulation of the store card industry. In the past, retailers were allowed to give instant discounts at the till to customers who signed up for the card. However, a review of the store card market by the Competition Commission (an independent public body that ensures fair competition between businesses) resulted in some new rules that went into effect March 2012. The shakeup means retailers can no longer offer discounts until seven days after a customer opens a store card.

The case for store cards
Despite the risks involved, if you're a savvy, responsible credit user, you may be able to use store cards to your advantage. If you embody the three following traits, you might consider getting a store card.

1. You are a loyal customer: After the week-long initial holding period, there are appealing discounts to be had if you stop regularly in a particular shop. The Topshop card, for example, offers a £5 voucher to use on a £50 spend and a 15% voucher to use on a £80 spend. Cardholders also get free shipping on certain purchases, an extra 10% off in the first week of summer and access to Christmas sales. The card comes with an APR of 19.9%, just slightly above the average credit card APR. store-card

Some store cards also have programs similar to those offered by rewards credit cards. Shoppers with a Warehouse card, for instance, can earn 1 point for every £1 spent. One hundred points will earn you a £5 voucher. Cardholders also get a 20% discount voucher when they open the account. However, the card comes with a hefty APR of 29.9%.

2. You can pay in full every month: The golden rule with any store card, rewards card or cash-back card is to make sure you can pay the bill in full every month. If you fail to do so, you'll find the interest charges that go hand-in-hand with the higher APR will heavily outweigh any benefits you gain from the card.

"There may be occasions where you can get an extra discount as a store card customer, but make sure you don't wipe out the money you've saved by shelling out on sky-high interest charges," warns Andrew Hagger of MoneyComms.

So make sure you're organised enough -- and have enough money -- to pay off your store card account every single month.

3. Your need to build credit: If you don't have much of a credit history or haven't borrowed money before, a store card can help you lay the groundwork for a solid credit rating. Some people with poor credit might find it easier to get accepted for a store card than a standard credit card, as store card credit limits tend to be lower and interest rates higher.

"As with any form of plastic, paying your store card balance on time every month will reflect positively your credit record," says Hagger.

However, be aware that if you don't make repayments on time you'll be doing your credit rating more harm than good by spending on a store card. To build up your credit, make it a point to make a few small purchases on your store card (never going above 30% of your credit limit) each month, and then pay the entire balance off before interest charges accumulate.

See related: How to use your credit limit to your advantage, Credit counsellors share consumers' biggest credit card mistakes

Published: 26 March 2013