It happens to just about everyone who visits a major retail store or website. You’re ready to check out and are given an offer that’s tough to refuse: a hefty discount if you immediately sign up for a store credit card.
Chances are, you’ll be tempted by the immediate bonus and might even sign up after hastily glancing at the credit card sales information. But when the bill arrives, reality kicks in. You have a new credit responsibility with an interest rate that may be higher than one on a general credit card.
Store Cards vs. Credit Cards
A store credit card is essentially a loyalty card with buying power, giving you benefits for shopping at a store that general cards likely can’t match. You’re given special consideration and deals because you’re using the store’s own card to make your purchases.
[Read: Best Rewards Credit Cards.]
Like with general credit cards, you’ll make charges, receive a statement and be expected to pay back your balance, but store cards and general credit cards are different in several ways:
— Store cards may not work outside the branded store and its partners.
— Store cards typically offer cardholder-exclusive discounts.
— It’s not as easy to shop around for store cards.
— Store cards may be easier to obtain.
— Store cards may have a higher APR.
Store cards may not work outside the branded store and its partners. Closed-loop store-branded credit cards can only be used at a particular store and its partner brands, while open-loop, co-branded store cards are more like general credit cards and can be used anywhere the card network, such as Mastercard or Visa, is accepted.
Store cards typically offer cardholder-exclusive discounts. An appealing feature that sets store cards apart from general credit cards is the potential for discounts. For instance, the card for Kohl’s department store gives you a 30 percent discount when signing up and a discount immediately after, plus additional discounts about 12 times per year ranging from 15 to 30 percent.
“If you have a favorite place that you shop, you should look into whether they have their own store card,” says Bill McCracken, president of Phoenix Synergistics, a marketing research company.
In fact, a 2017 study by Phoenix Synergistics showed nearly three-fourths of consumers who have store-branded cards use them instead of general purpose cards because of deals, discounts and rewards. This is most common among consumers ages 18 to 49, as well as those with higher incomes, the study showed.
It’s not as easy to shop around for store cards. Store card holders may be blinded by discounts and fail to do adequate research before signing up for a store card.
“One of the biggest issues with store cards is how they’re obtained,” says Matt Schulz, chief industry analyst at personal finance site CompareCards by LendingTree. “We get the offer at the checkout counter, feel a lot of pressure, don’t think about taking the time to learn details of the cards, then we make a snap decision not knowing all the information. People do not make the best financial decisions when they’re rushed and pressured.”
Store cards may be easier to obtain. One of the advantages of store-branded credit cards is that people without much of a credit history are often able to get them.
“They’re relatively easier to obtain than a general purpose card,” McCracken says. For that reason, store cards could be a good choice for younger consumers as they start building their credit history, he says.
Store cards may have a higher APR. After possibly making a hasty decision about applying for the card, consumers can get a bigger surprise when the bill arrives and they see the interest rate. The average APR for retail cards is about 25 percent, compared with about 17 to 24 percent for general credit cards.
While the initial discount of 15 to 30 percent on one day’s purchases might attract you to a store card, consider the consequences before committing.
“The downside is that it doesn’t make any sense to pay 25 percent interest on a purchase to save 15 percent,” Schulz says. “Those interest rates — if you don’t pay the balance in full quickly — can outweigh any discount or perk that you will receive. That’s true with any credit card, but especially true with store credit cards because the APRs are so high.”
[Read: Best Credit Cards with High Credit Limits.]
Choosing a Store Credit Card
The best time to sign up for a store-branded or co-branded credit card is after you’ve done a cost-benefit analysis on whether it will be an ideal fit in your credit card portfolio.
For example, you might have five stores where you regularly shop, but one or two you visit — in person or online — get the majority of your spending money. If those stores offer credit cards that reward behavior you’re already exhibiting on a weekly or monthly basis, it’s likely those would be the best choices.
The key is not to get carried away in the pursuit of rewards, no matter how favorable the terms.
“You should never overspend to get credit card rewards, regardless of how lucrative those are,” Schulz says. “Find a card reward for stuff you’re already spending on. It really is about finding the card that fits your lifestyle rather than shifting your life around to fit the card.”
Should You Have Multiple Store Cards?
Most consumers have multiple credit cards. In fact, a 2017 study by consumer credit reporting agency Experian found that consumers have an average of nearly four credit cards. Retail or store-specific cards are most popular, used by 41 percent of those surveyed, edging out rewards credit cards, which came in at 39 percent.
Most often, store credit cards are a complement to general credit cards, not a replacement, because of their narrowly designed purchasing options.
But owning multiple credit cards can be stressful. Some consumers worry that they’ll lose track of the cards, and then their credit score will suffer. For example, consumers who are living paycheck to paycheck and haven’t planned for a store credit card bill might be surprised when it arrives. That makes it more likely they will carry a balance to the next month and pay more money in high interest rates.
One or two store-branded or co-branded cards should be enough for most people, McCracken says.
“You don’t need to have six, eight or 10 retailer cards,” McCracken says. “If you have that many, you’re not using them enough to justify the rewards. Consumers should look at the one, two or three retailers where they spend a lot of money.”
Schulz says most people don’t have to worry about hurting their credit rating when they get an extra card or two. “As long as you pay the bills on time, keep the balances low and don’t apply for a half-dozen cards at a time, having a lot of credit cards isn’t really going to hurt your credit score in and of itself,” he says. “It’s about how you use the credit more so than how many you have.”
He suggests owning a general purpose rewards card, a card from your favorite store and another emergency card.
“If you have one card, are perfectly happy with it and don’t want to get another one, then you shouldn’t get (a new store card),” Schulz says. But he says it might work for you if you’re not going to be tempted by more available credit and can remember to make payments on time.
[Read: Best Low-Interest Credit Cards.]
When Store Credit Cards Aren’t a Good Choice
You should avoid a store credit card if you don’t shop at the store enough to enjoy the benefits and if you have trouble paying your balance each month.
“If you’re someone who carries a balance in general and carries large balances, you may want to weigh how much extra you’re paying in interest for this card versus the discounts you’re getting,” McCracken says.
In contrast, a general credit card would likely have more favorable interest rates that allow you to carry balances with less of a penalty. General credit cards also allow you to shop at a variety of businesses and get a much broader portfolio of rewards.
“If you’re somebody who isn’t loyal to any particular store, and are just looking for the best rewards and lowest interest rates, then store cards aren’t going to be the best choice, Schulz says.
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How Are Store Cards Different From General Credit Cards? originally appeared on usnews.com
