Store credit cards vs. personal loan vs. payday loans

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Ask a Lender
March 21, 2017 | Updated September 25, 2017

Key Points

How store credit cards stack up against loans

  • Store credit cards are easier to qualify for, but have higher interest rates.
  • Multiple applications for store credit cards could hurt your credit.
  • Personal loans usually carry lower interest rates than store credit cards.
  • Payday loans are typically used for everyday expenses, not retail purchases.

It’s not uncommon these days for the cashier, after they have rung up your purchase, to ask whether you’d like to save a percentage off your total purchase by signing up for a retail store credit card.

Saving money is always tempting. But are retail store credit cards a good deal? What does it take to qualify for one? How do they stack up against other credit options, such as personal loans or payday loans?

What is a store credit card?

Store credit cards are offered by a variety of retail stores. They often can be used only at the retailer providing them, and have smaller credit limits and higher interest rates than other credit cards.

One of the main considerations on any credit card application is your credit score. Store credit cards may accept lower credit scores than other cards. Your credit score is not the only factor lenders take into consideration, however. Your income, employment status, debt-to-income ratio, and willingness and ability to make monthly payments on your credit card balance are all factors that will likely be taken into account.

There are benefits to store credit cards. You often can qualify for discounts if you use them, which can be a good deal if you pay off the credit card balance before it accrues interest.

Store credit cards have one other major perk: If you’re trying to build or repair your credit, they are often easier to qualify for than a regular credit card. As long as you keep your credit utilization low, opening one may improve your credit score.

They also have the potential to hurt your credit score, however, because each inquiry into your credit can lower your score by about five points. Whereas multiple inquiries for a home or auto loan made in a short amount of time may be counted as one inquiry, because it makes sense that you would shop around for the best rate, applying for several credit cards at a time can set off red flags that make you look like a risky borrower.

According to myFICO, opening too many accounts too quickly also can hurt your credit by lowering the average age of each of your accounts.

What is a personal loan?

A personal loan, also called an unsecured loan (although credit cards are technically a type of unsecured loan), is a loan made solely on the borrower’s creditworthiness and not based on collateral, such as the case with an auto or home loan.

Personal loans could be used to make large purchases that you might otherwise use a store credit card to make. The main benefit of using a personal loan for such a purpose is that you’ll likely earn a lower interest rate, which will save you money in the long run.

It can be more difficult to qualify for a personal loan than a store credit card, however. If your credit score is not high enough to get approved for a personal loan, a store credit card might be a better option.

What is a payday loan?

A payday loan, according to the Consumer Financial Protection Bureau (CFPB), is a short-term loan for a small amount, usually $500 or less, that is usually due on the borrower’s next payday.

Payday loans probably aren’t a good alternative to a store credit card. According to surveys conducted by The Pew Charitable Trusts, most payday loans are used to cover everyday living expenses such as car payments, mortgage payments, credit card payments, utilities, food and rent. They are also often advertised as a solution to unexpected expenses such as vehicle repairs.

And although store credit cards carry a higher interest rate than personal loans, payday loan fees are even more expensive. Finance charges for payday loans range from $10 to $30 for every $100 borrowed; a typical two-week payday loan with a $15 fee per $100 borrowed results in an annual percentage rate of almost 400 percent, according to the CFPB.

In October 2017, the CFPB announced that it was implementing new regulations on payday loans. Under the regulations, payday lenders would need to prove borrowers could pay back the loan within 30 days while still meeting basic living expenses. The regulations are expected to take effect mid-2019, but Congress has 60 days to nullify them, so their fate is not certain.

Everyone’s situation is different, so the best way to tell if a retail store credit card or a loan will work best for you is to research the different options available to you and determine which one is the best fit. Take into account your current credit score, the interest rate you will be paying, and what effect applying for a loan or credit card will have on your credit score.  With a little effort, you can save money and build up your credit along the way.

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