Store credit cards offer discounts and perks for frequent shoppers, but they aren’t for everyone.
If you frequently shop with a particular retailer and can pay off your balance before interest charges apply, you may benefit from a store credit card. Before you apply, consider how much value you can get from the card and if it’s worth any possible risks to your credit report and finances.
How Store Credit Cards Work
Store credit cards, also known as retail cards, are cards offered by a retailer. Some can only be used for purchases with the store or its partners. These are known as closed-loop cards. Others are open-loop, co-branded cards that can be used anywhere within the card’s network, such as Visa or Mastercard.
Cardholders are typically eligible for discounts with store credit cards. They may come with an enticing discount at checkout, such as 20 percent off your first purchase when you sign up. Some store cards offer ongoing discounts such as 10 percent off at the register or online. Others offer loyalty rewards such as cash back or a certain amount of points per dollar spent with the retailer or elsewhere.
Usually, store credit cards have lower credit limits than typical credit cards and often carry a higher annual percentage rate than other types of credit cards.
“It’s not uncommon for retail store cards to have limits near or even below a few thousand dollars, while general-use cards can have limits well in excess of $25,000,” says credit expert John Ulzheimer, formerly of FICO and Equifax. He says their high rates and low limits make them easier to qualify for, similar to a subprime credit card.
[Read: Best Secured Credit Cards of 2018.]
Retailers don’t want to turn down loyal customers, so you’re likely to be approved for a store card even if your credit isn’t perfect. Instead, they want to encourage you to come back and use your card to shop at their store.
Pros of Store Credit Cards
— Discounts: You can take advantage of introductory and ongoing discounts available to store credit card holders.
— Easier qualification: If you’re unable to qualify for a general-purpose credit card and don’t want to apply for a secured card, a store credit card may be a good alternative.
— Credit building: Store credit cards generally report payment history to credit bureaus just like regular credit cards. If you consistently make your payments on time, using a store credit card can help you establish or rebuild your credit history.
— Cardholder perks: These can include free shipping, extra days for returns, free alterations, returns without receipt and a birthday gift.
Cons of Store Credit Cards
— High APRs: You can expect an APR of about 24.99 percent, which is nearly 10 percentage points higher than the average for all credit cards. If you carry a balance, you might spend more in interest than you save or earn with discounts and rewards.
— Low credit limits: Store credit cards typically have lower credit limits than other types of cards. Using 30 percent or more of your credit card’s limit is generally a cause for concern for lenders, so this can lower your credit score.
— Limited usage: Closed-loop store credit cards can only be used for purchases with the store or brands in a store’s parent company.
— Deferred interest: Unlike zero percent introductory APR cards, some store credit cards have deferred interest, which will retroactively charge interest if you don’t pay the full balance in a certain period of time.
— Limited redemption options: With some cards, you can only redeem points, cash back or other rewards at the brand’s stores.
— Pressure to spend: Store credit cards encourage loyalty, so you may be less likely to price shop. The retailer may send you special promotional offers, discounts and emails about sales. If you struggle with overspending, it could be difficult to control the temptation offered by these sales.
— Potential for misunderstanding: If you sign up for a retail credit card in-store, full terms are generally not explained at the point of sale. Typically, you will be handed a brochure, and you may not have time to look into the costs of the card and compare it with other offers.
Interest on Store Credit Cards
On average, store credit cards have an APR of 24.99 percent. The average APR for all credit cards is between 16 to 17 percent, so store credit cards can be more expensive in the long run. You should calculate to see if the value of a store card is worth the higher interest rate.
Using a store credit card may only make sense if you don’t carry a balance. Carefully consider whether the interest charged on your balance is likely to outweigh discounts or rewards. A 15 percent discount on a one-time purchase isn’t worth more than a 25 percent interest rate.
Although it’s best not to carry a balance on retail store cards, many people do. According to Experian, baby boomers hold an average of 2.7 retail credit cards and have an average balance of $1,931. Gen Xers hold an average of 2.6 retail credit cards and have an average balance of $2,122.
How Store Credit Cards Affect Your Credit History
Hard inquiry: Any time you apply for a new credit product, such as a store credit card, the issuer will perform a hard inquiry on your credit report. Generally, a single hard inquiry is not harmful to your credit, and many consumers will see a temporary credit score drop of five points or less.
[Read: Best No-Annual-Fee Credit Cards of 2018.]
However, multiple hard inquiries can have a greater impact on your credit score, especially if you have a short credit history or few accounts. A large number of inquiries can signal to creditors that you’re headed for trouble, so applying for several store cards at once could be harmful to your credit rating.
Credit utilization: With generally low credit limits, store credit cards may increase your credit utilization rate. Your credit utilization is the amount of your revolving balances divided by how much revolving credit you have available. This factor can impact up to 30 percent of your credit score.
Lenders typically want to see a credit utilization rate of 30 percent or less. On a store credit card with a $500 credit limit, you can reach a credit utilization rate of 30 percent with just one $150 purchase.
However, if you rarely use your store credit card, pay off your balance immediately or carry a low balance, the available credit on your card can increase your overall available credit and drive down your utilization rate.
Payment history: Just like other credit cards, store credit cards report your payment history to major credit bureaus. When you make at least the minimum payment on time, this can be helpful for your credit score. If you’re not able to keep up with payments, it can hurt your score.
“You want to make sure you’re organized if you use one of these cards,” recommends Gerri Detweiler, education director for Nav.com, a business credit and financing resource. “If it’s not in your normal rotation of bills that you pay each month, you may end up with a late payment.”
How Deferred Interest Works
You may qualify for special financing with a store credit card if you want to make a large purchase like an appliance. Special financing allows you to pay off the purchase with no interest for a specified time period such as 12 months, but you’ll typically be subject to deferred interest.
“If you fail to pay back the entire amount by the end of the interest-free period, you may be charged interest back to the date of purchase,” says Detweiler. It may also apply if you’re more than 60 days late making a minimum payment before the end of the deferred interest period.
Deferred interest is different from a zero percent APR promotion offered by other types of credit cards. With an introductory zero percent APR, you won’t be charged interest during the promotional period as long as your account is in good standing. You won’t pay retroactive interest if you still have a balance at the end of the promotional period, but interest will start to accrue on the remaining balance at the regular APR.
Deferred interest can make large purchases more expensive and cost more to finance than a zero percent APR offer. For example, a $350 dishwasher purchase in a deferred interest plan would leave you with $87.47 worth of interest if you haven’t paid it off after 12 months. Let’s say you’ve made $25 monthly payments. If you used a zero percent APR offer, after paying off $300 in 12 months, you would need three more months to pay off the remaining $50 at 24.99 percent APR if you continued paying at least $25 a month. For the deferred interest path, after the promotional rate expires, it would take six months to pay off the balance of $137.47 with the same rate and monthly payment.
When Store Credit Cards are a Smart Choice
Loyal shoppers who can responsibly manage credit may benefit from store credit cards. You can earn and redeem rewards and take advantage of discounts. But generally you’ll only come out ahead if you can pay your balance each month.
[Read: Best Rewards Credit Cards of 2018.]
“If you are going to make a significant purchase at a store and you will get an attractive discount, it may be worth opening a store card,” says Detweiler, who notes most store cards do not carry an annual fee.
A store card with no annual fee can offer a no-cost way to increase your available credit and drive down your overall credit utilization rate, which can improve your credit rating. You could make one purchase to take advantage of a discount, pay it off, then leave the account open but stop using it.
When You Should Avoid Store Credit Cards
If you plan to carry a balance, struggle with debt or have trouble staying within your budget, store credit cards are not a responsible choice. The high APRs and low credit limits typical of store credit cards mean you’ll pay significant interest charges if you carry a balance and may drive down your credit rating if you have a high balance relative to your credit limit. Leaving a balance on a deferred interest promotion can be costly as well.
A low-interest-rate credit card or even a low-interest-rate personal loan may be a better choice if you plan to carry a balance, says Detweiler.
If a store credit card has an annual fee, consider how much you’ll use the card and if the value of rewards, discounts and perks outweighs how much you’ll pay for the annual fee and interest. Also ask yourself whether you could get the same value from another source, such as regular coupons or a general rewards card.
Ulzheimer says a store credit card is never a smart choice. “You can buy the same things and shop at the same stores using a Visa, Mastercard, American Express or Discover. And your terms are going to be better.”
But Detweiler is a fan of store credit cards if they work for you: “Think honestly about how you use the card and how often you’ll use the card.”
More from U.S. News
Do I Have Too Many Credit Cards?
Why Did My Credit Card Limit Increase?
The Pros and Cons of Credit Cards
Can You Benefit From a Store Credit Card? originally appeared on usnews.com
