Shopping Credit Cards Explained

Updated: Feb 18, 2023

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Can a shopping credit card be used for improving your credit score?

A shopping credit card can be used for building strong credit. Even though shopping credit cards have lower credit limits compared to general-purpose cards, they can be used to improve credit score. The first important thing is to keep the balance below a third of your credit limit.

Some merchandise credit cards fit into the “credit-builder cards” category. These are good for people with poor credit history. They are easily approved by anyone even if they have poor credit. If you have a bad credit history or no credit history, these cards are a good choice.

This is why these cards have high-interest rates and low credit limits. If you use these kinds of cards while paying off all bills on a regular basis, you can improve your creditworthiness and your credit score. This opens up new opportunities for loans or other cards in the future.

Dont rush into getting a shopping card with the promise of an improved credit score. First, read carefully offer terms & conditions, analyze your finance options, and whether you will be able to use the card properly towards improving your credit score.

Determining the shopping credit utilization ratio

We mentioned that keeping the balance below 30% of your credit limit is good for your credit score. This is because the used credit limit carries a lot of value. The current debt compared to the remaining credit limit is defined as a credit utilization ratio.

Keeping the credit utilization ratio as low as possible also helps improve your credit score. For example, if your shopping card’s credit limit is $1000, you should never have a balance that’s over $300. If possible, keep it even lower. You can also adopt the strategy of making smaller charges on your merchandise credit card and paying them off entirely every month.

This is how you show future and current lenders that you are responsible for handling your credit. By doing this, you can get greater limits on your shopping cards which will allow you to boost your credit score even further.

How to calculate credit card utilization

Calculating credit card utilization is even easier than calculating your interest rate. Like with interest rates, you will need the card billing statement. Additionally, if you have one, you can log into your online account to get all the relevant information. If not, simply call the customer service line of your credit card provider to get information about your unsecured credit limit and the latest balance. The latest edition of your credit report also might be quite handy as it has all the important account information.

Step 1: Find your current credit limit and balance

The latest card billing statement has your credit limit and current balance. If you can’t find the limit there, make sure to call the customer support of your credit card provider.

Step 2: Divide your balance by your credit limit

Enter your balance number in a calculator and simply divide it by your credit limit.

Step 3: Multiply by 100

In the end, multiply the result you’ve gotten by 100. This is how you will get an accurate credit utilization percentage. Remember that it’s generally a good idea to keep your credit utilization percentage under 30%. Bear in mind that the best credit holders have around 10%.

If your goal is to improve the credit score, always make sure to keep credit utilization in check and keep it around 10% to get the best results.

Shopping card impact on credit history

Your credit card history is nothing more than a pile of information concerning your spending habits and credit behavior. The credit history affects your overall credit score, and this is why it’s important to have consistency. Building a good credit score takes time. Luckily, shopping credit cards can be used for improving your credit history and building up your credit score from scratch. Unlike other credit cards, getting a store credit card doesn’t undermine your credit score. They are a great way to build a new file along with your credit history by using the card responsibly making payments on time, keeping your utilization under 30%, and, over time, you will build a better credit history.

Where do shopping credit card rewards come from

Credit cards aren’t given to users for free, and issuers also have to make money off them. The 3 main sources of revenue for card issuers include:

  • Fees
  • Interest
  • Interchange

Even though you’ve probably heard of fees and interest, chances are you’ve just heard about interchange for the first time. Every time you use your card, the merchant needs to pay for a fee for the payment to be accepted. A part of this fee goes to the card issuer which can range from 1% to 3% of the purchase along with a flat fee.

Fees, Fees, Fees

This is called the interchange fee. These fees can vary in many things, including card type, country, merchant, and so on. Even though you as a credit card user won’t see them mentioned anywhere when getting your own credit card, you will be paying for these fees the whole time you are using your credit card.

Some stores that give out shopping cards also come with usage fees through which they return a percentage to their users through rewards. On the other hand, there are stores that have no usage fees, but they incorporate these expenses and rewards into product prices. Given the fact that you can use their shopping offers to buy their products only, they are still able to make revenue.

Shopping card rewards aren’t for free, and your issuer isn’t doing you any favors.

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