Editorial Policy

Catalog Cards are a Risky Credit Shortcut

Eva Norlyk Smith Ph.D.

October 11, 2012

For those with bad credit, catalog credit cards (also known as merchandise credit cards) present a tempting short-cut to a better rating.

Catalog cards, such as Horizon Gold, Blair, Fingerhut and 1st Platinum Plus (issued by the Player Vacation Club), are credit cards tied to a specific line of merchandise offered by the issuer. You use your line of credit to shop the issuer’s online catalog (which generally includes clothing, electronics and household items), pay your balance and eventually establish a credit score good enough to get you a better card.

Catalog cards are easy to get, help you rebuild your credit and often have high limits. So what’s not to like? There are, in fact, plenty of catches —  and, if you don’t tread carefully, these cards can cost you a pretty penny.

Considering the pros
Catalog credit cards accept applicants regardless of previous credit history, require no security deposit, start new users out with credit limits as high as $3,500 (in some cases higher) and report credit activity to some or all of the major credit rating agencies. That helps people with poor credit climb the credit ladder faster.

“We’ve had clients, who after only a few months of using a catalog credit card began to get solicitations from credit card companies for other types of credit cards,” says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies. “You still have to be careful, however, because they also have a lot of bad features. But as far as improving your credit score goes, catalog credit cards can be an excellent way to rebuild credit.”

One reason catalog credit cards can help jump-start your credit is the higher credit limits they generally offer. Secured credit cards (also designed for those with bad credit) typically start people out with an initial credit line of $300 — in exchange for a deposit. In contrast, many catalog credit cards start users out higher, with no deposit required. Horizon Gold guarantees a credit limit of at least $500. 1stPlatinumPlus, meanwhile, is willing to go up to $3,500.

Why does this matter? FICO scores detract points for keeping high balances on credit cards. This component of credit scores is known as credit utilization, and it makes up a full 30 percent of FICO scores. For the best credit scores, experts recommend keeping balances under 30 percent of the total credit limit.

For a card with a $300 credit limit, that would mean never letting credit card balances run up over $90. In contrast, for a card with a credit limit of $3,500, there’s less need to worry about credit utilization.

Watch out for the cons
Once you start considering the cons — and there are plenty — you might find that catalog credit cards may not be the free lunch you’d hoped for.

For starters, merchandise credit cards can only be used to purchase products and services sold by the card issuer — products you may or may not need. In other words, a catalog credit card does not offer the convenience of regular bank credit cards, which can be used almost anywhere.

Some catalog credit cards, like those issued by Blair and Fingerhut, are essentially department store credit cards. They give you a credit line to buy clothing, jewelry, home decor and other household items — and, like many retail credit cards, the card can be used only to purchase items with the store chain and its affiliated vendors. Similarly, the 1st Platinum Plus card can be used only to purchase items on the website eClubUSA.com.

Usage limitations aside, catalog credit cards can be costly companions. Access to the 1st Platinum Plus card, for example, require a $29.95 monthly membership fee, the equivalent of an almost $360 annual fee. The Blair credit card starts users out with a 26.99 percent purchase APR, just a few points shy of the average credit card’s penalty APR of 29.90 percent.

Just as bad, card users in many cases end up paying a price premium on the products and services they buy. At eClubUSA, you can use the 1st Platinum Plus card to buy the 1G version of the Nook Tablet from Barnes & Noble for $345. Only a mouse click away at Amazon.com, the new 16G Nook tablet can be purchased for $204. However, because prices are advertised in terms of down payment and monthly payments, the exact price difference can be difficult to determine.

As a group, catalog credit cards feature some of the most murky terms in the industry. It takes determined digging to find out what the terms are, and even to find them in the first place. For example, not until you reach the bottom of the terms and conditions for the Blair card is it obvious that the card can be used only with the Blair store catalog or website and its affiliated vendors. The  1st Platinum Plus card, meanwhile, advertises that it reports to a major credit bureau, but is mum about which one and how often. Boosting your FICO credit score with only one credit bureau reporting your payment activity can prove to be difficult since the score takes into account the activity reported from all three bureaus.

The bottom line
Given the considerable cons, should you stay clear of catalog credit cards entirely? It depends on what your objective is.

“The only reason to get a catalog credit card really is to build your credit,” Jones says. “Otherwise there are too many downsides. So be sure to pick one that reports to the credit bureaus. Some do and some don’t.”

Using a catalog credit card for a short while may lift your score enough that you will qualify for a regular bank credit card, and that could be a good enough reason for a short-term added expense. However, before venturing into the murky world of catalog credit cards, be sure you have the self-discipline to avoid impulse purchases, and educate yourself carefully about the terms and conditions before applying.