With the holiday shopping season heating up, retailers may try to sell you on the idea of opening a retail store credit card. While store credit cards can potentially yield savings and rewards, first consider what one could really be worth to you, compared with a traditional rewards card.
Store cards have both pros and cons. As you plan your holiday shopping, here’s what you need to know when deciding whether a store credit card should be part of it.
What Is a Store Credit Card?
A store credit card is branded to one particular store or family of stores. There are two ways these cards can work.
First, you might only be able to use a store card with a specific retail brand. For example, your favorite department store might offer a credit card that’s exclusively designed for making purchases there. An exception might be if your card also allows you to make purchases at sister brands owned by the same company.
Other store cards offer more flexibility. If your store credit card has a Visa, Mastercard or American Express logo, that means you can use it to make purchases anywhere Visa, Mastercard or American Express are accepted, in addition to that store.
Once you understand the difference between the types of credit cards, you can compare the rewards, benefits, credit limits, interest rates and fees on each card.
What Can You Expect From a Store Credit Card?
There are certain things that differentiate a store card from a traditional rewards card. Here are the most significant features that set them apart.
Upfront Discounts
One way retailers entice shoppers to open a store card over the holidays is by offering a big discount on your first purchase. For example, you might get 10%, 20% or more off when you open an account online or in-store and make a purchase that same day. Those discounts can be used immediately to offset holiday expenses, says John Cabell, director of wealth and lending intelligence at J.D. Power.
This type of perk is something you might appreciate if you’re doing most of your holiday spending at one or two stores. If you’re spending $500 at a single store, for example, a 20% discount would yield $100 in savings, assuming there are no limits.
[Read: Best Store Credit Cards.]
On the other hand, regular rewards cards can offer bonuses in the form of cash back, miles or points. The catch there is that you have to meet a minimum spending requirement. For instance, you might need to charge $500 to get $200 in bonus cash back. When you compare that type of benefit to what a store card offers, a regular rewards card could be the more valuable option.
Rewards Structure and Other Perks
While a traditional rewards card might offer cash back, miles or points on purchases, store cards may limit you to earning points only. Again, you may also be restricted to earning points on purchases at that store if your card doesn’t bear the Visa or Mastercard logo.
When you’re ready to redeem points, you may only be able to exchange them for a gift certificate to the store with which the card is associated. That could be a drawback if you’d prefer more flexibility with redemption options, such as using points for merchandise, a statement credit or travel. It’s also worth noting that not every store credit card offers an ongoing rewards program.
Some cards offer extras like one-day shopping passes that allow you to make purchases at a discount and access to exclusive promo codes and coupons, such as for your birthday. If the card is issued on the Visa, Mastercard or American Express network, you may be able to enjoy even more benefits, such as travel insurance or roadside assistance.
Special Financing Terms
Some store cards may offer promotional financing to cardholders, allowing you to defer paying interest for a set period of time. That’s great if you’re hoping to save money on interest for holiday purchases. The caveat might be that you need to spend a certain amount or purchase eligible items for a deferred interest promotion to kick in.
“Sometimes you can get a zero-interest deal that can last from six to 24 months,” says Mike Moody, an instructor with the department of retailing at the University of South Carolina. “But you must be very focused on making monthly payments that remove the balance before the incentive ends.”
Once the deferred interest period is over, interest charges could be applied to your balance retroactively from the date you first made the purchase. Just making the minimum payments probably won’t be enough to pay the balance in full before the deferred interest period ends. And if you make a late payment, you risk losing your deferred interest benefits altogether.
Potentially Higher APRs
If you’re opening a store card for the holidays that doesn’t offer deferred interest financing, read the fine print on the annual percentage rate. Store credit cards can carry higher interest rates compared with regular rewards cards. The average minimum APR for store cards is about 21%, versus the average minimum APR of about 17% for all credit cards.
[Read: Best Credit Cards for Fair Credit.]
If you’re still carrying a balance after the holidays, the interest charges could detract from any money you saved by receiving an upfront discount.
“Often with holiday shopping, consumers tend to spend more than they can pay off in one month,” Cabell says. “So the downside of opening a new credit card in the holiday season is that it becomes easier to accumulate more debt and interest charges that have to be paid back at a later date.”
Aside from that, paying interest could also offset the value of any rewards you might be earning from your gift purchases or post-holiday spending. You may, however, be able to avoid an annual fee since they tend to be less common for store credit cards.
Easier Qualification
One upside of opening a store card for the holidays is that it might be easier to qualify, even with less-than-perfect credit. Store cards tend to be more accessible to shoppers with lower credit scores compared with traditional rewards cards.
That could help you build credit over time if you’re using the card responsibly, which means paying your bills on time and not using too much of your available credit.
Lower Credit Limits
A potential drawback of store credit cards is that they may not give you as much purchasing power as a regular rewards card. For example, your initial credit limit may only be a few hundred dollars.
If you’re planning to use a store card for holiday expenses, its credit limit might not be enough. You’d then have to come up with the difference in cash or charge the remainder to another credit card. At the end of the day, you may not feel it’s worth the trouble to do that just to qualify for an initial discount on the purchase.
Is a Store Card the Right Choice for Holiday Shopping?
Whether it makes sense to open a store card over the holidays really comes down to lifestyle, says Cabell. “If you have broad spending patterns, a more general rewards or cash back card may work best.”
Ultimately, if you wouldn’t use a store card to shop after the holidays, opening an account may not be worthwhile. Though it could save you money long term if you’re already a loyal shopper at that particular store throughout the year.
[Read: Best Cruise Credit Cards.]
When comparing store cards, remember to consider the basics:
— Estimate the value of any initial discount, if one is offered.
— Read the terms and conditions on deferred interest financing, taking note of the regular APR for purchases.
— Review the rewards program to determine how you can earn rewards and how they can be redeemed.
— Make a note of where the card can be used — and where it can’t.
— Check the card’s details for any added incentives, such as birthday discounts or special sales events for cardholders.
Most importantly, have a strategy when using a store card for the holidays.
“Stick to a budget and don’t overspend because if you carry a balance, you may end up spending more than you would have without the card,” Moody says. “Use (store) shopping cards for purchases you were planning to make anyway, especially if they are large purchases and you can earn a significant reward.”
Last but not least, create a post-holiday plan for paying off the balance to avoid a holiday debt hangover in the New Year.
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Should You Open a Store Card for Holiday Shopping? originally appeared on usnews.com
