They are like all credit cards, only with very high APR
Store credit cards are a great way to start your credit. They work just like standard credit cards, only that store credit cards tends to have very high interest rate.
All credit cards work pretty much the same:
- You have a minimum monthly payment, that is typically 3% to 5% of the balance or $10, whichever is higher.
- If you pay the balance in full every month, you don’t pay any interest.
- If you pay less than the full balance, you pay interest on the remaining balance.
- Interest is based on t he average daily balance times daily interest rate(1).
The problem with store credit cards is the outrageously high interest rate (20% up to 30%). If you pay the minimum payment every month, most of it will cover the interest and only a small amount actually goes toward reducing the balance. This means that it will take you a very long time to pay off the balance, while paying tons of interest during that time. This makes your purchases extremely expensive – more than double the original purchase price!
Store cards are convenient, but you can end up paying tons of interest if you run up balances on them. Only use them if you can avoid carrying balance. Use them for regular purchases, wait for the statement and pay it in full before the due date. That will build up your credit while avoiding high interest rates.
(1) Total Interest = Average Monthly Balance (total of each day’s balance, divided by the number of days) times the Monthly Interest Rate (APR divided by 12).