Store credit cards can offer enticing introductory offers and perks, but they can also have high interest rates and wreak havoc on your finances if you don’t pay them off on time. Used responsibly, store credit cards can help you build credit while scoring deals, but go astray and you may end up paying exponentially more for those shopping splurges.
Before you apply for a store credit card, think about your spending habits and how much value you can expect from the card. Don’t let a store clerk pressure you into signing up unawares. Here’s what you need to know to decide if a store credit card is right for you.
How Do Store Credit Cards Work?
Many retailers offer store credit cards, also called retail cards, by partnering with banks and, in some cases, credit card networks such as Visa or Mastercard. The cards provide credit to interested shoppers.
Store credit cards also often come with incentives, such as a discount for first use at the store or ongoing discounts or rewards for shopping with the brand. Great as this may sound, keep in mind that benefits may be restricted to spending with the affiliated retailer.
[Read: Best Store Credit Cards.]
But store credit cards also typically carry higher annual percentage rates and lower credit limits than other credit cards. “Store cards have subprime terms, which means very low limits and APRs that are generally well into the 20% range,” says John Ulzheimer, a credit expert who previously worked at FICO and Equifax.
Higher APRs mean a higher cost if you don’t pay your balance off in full each month. This cost can quickly wipe out the value of any discounts or other benefits the card offers.
Can You Use Store Credit Cards Anywhere?
Some store credit cards are designed to be used only with the designated store or brand, but others allow you to shop anywhere within the card’s network.
For example, the Old Navy Credit Card can be used at any Gap Inc. brand, which includes Old Navy, Gap, Athleta and Banana Republic. In contrast, cardholders can use the Gap Good Rewards Mastercard anywhere Mastercard is accepted.
[Read: Best Starter Credit Cards.]
What Are the Pros and Cons of Store Credit Cards?
Store credit cards have several benefits, including:
— Easier qualification process. A store credit card may be a good option if you struggle to qualify for other credit cards.
— Can help build credit. With responsible use, store credit cards can help users build a stronger credit history. Just make sure your card activity gets reported to the credit bureaus.
— Discounts. Store credit cards frequently offer a discount when new cardholders make a purchase with the store. Store cards may also earn continuing rewards and provide perks for purchases made at the store.
But store credit cards are not without their drawbacks, including:
— Lower credit limits. Store credit cards typically have lower credit limits than general credit cards, which can make it hard to stay at or below the 30% credit utilization range experts recommend.
— Limited usability. Closed-loop store credit cards can only be used at one or a handful of stores.
— Limited rewards redemption options. You may only be able to redeem rewards or loyalty points you earn with the issuing brand.
— Deferred interest charges. Store credit cards may use deferred interest rather than a 0% introductory APR. This means interest is charged retroactively if you don’t pay your balance off before the promotional period ends.
— High APRs. Store credit cards averaged APRs of nearly 29% in September 2023, according to Bankrate. In contrast, the average APR for all cards as of May 2024 was 21.51%, according to the Federal Reserve.
[Read: Best Rewards Credit Cards.]
Should a Store Credit Card Be Your First Credit Card?
Store credit cards can be easier to qualify for than traditional credit cards because stores want every applicant to be approved, says Ted Anders, vice president of payments strategy and operations at Affinity Federal Credit Union.
“Each issuer has their own minimum requirements, but consumers who have scores well below average can normally get store cards with no problem,” says Ulzheimer.
Store cards can be a good option for consumers who want to build their credit but don’t have enough for a security deposit for a secured credit card. Lower credit limits could also curb spending, so a store credit card could be a good tool to teach money management.
It’s worth noting, though, that if you do go this route, choose a store you shop at often. It wouldn’t make sense to apply for a store credit card just for the discount at the register and then never use it again.
When Are Store Credit Cards a Good Idea?
Before signing up for a store credit card, consider your personal balance sheet and spending behavior, says Mike Rittler, former general manager of retail card services, personal lending and business development for TD Bank. Ask yourself questions like: Will the discounts and rewards save me money over time, or will I be more inclined to overspend? Do I have a healthy relationship with my existing credit lines? Can I use this card as a tool to responsibly build my credit?
Store credit cards are a good idea if you consistently shop at that store and don’t mind a lower credit limit. But be wary of those high interest rates.
Store credit cards are not a good choice if you tend to overspend, already have a lot of debt or don’t think you’ll be able to pay your card off each month. The high APRs on many store credit cards can lead to hefty charges if you carry a balance. And if you’re able to qualify for cash back cards or general rewards cards, they may offer more value.
How Can You Choose a Store Credit Card?
When choosing a store credit card, you should think both short and long term. Think about the stores you frequent and benefits you’d use the most, such as free shipping or returns without receipts, says Rittler. Then look for a card with an attractive introductory offer, especially if you have a big purchase planned.
Some store cards offer special financing options. This can be particularly useful for large purchases like furniture or electronics, but it’s important to understand the terms of any offers.
“For example, some cards may offer deferred interest financing for six to 12 months, which can be a cost-effective option for consumers who are confident they can pay off their balance before the end of the promotional period,” Rittler says. “But if they don’t, the accrued interest will come due at once.”
If overspending is a problem for you, you may want to choose a retail card for a store that you don’t frequent or that is far from your home, says Tania Brown, a certified financial planner and vice president of coaching at OfColor, a service for improving the financial health of employees of color. In this case, you won’t get as much value from the card, but you also won’t be as likely to accrue debt or damage your credit score.
Also consider whether the card charges an annual fee and compare APRs. If you can qualify, you should consider whether you would get more value from a general cash back or rewards credit card before you apply for a store credit card.
Store Credit Card Alternatives
If you’re leaning toward a store credit card because of in-store benefits, a co-branded (or open-loop) credit card may be a better option. One good example is opting for the Prime Visa Credit Card instead of the Amazon Prime Store Card. Both are accepted at Amazon, but only the Prime Visa can be used at other places like restaurants and gas stations.
If your main goal is to build credit, a secured credit card is the better option. Yes, a security deposit is required, but you’re not limited to one place to make all of your purchases. Some secured cards even offer rewards like the Capital One Quicksilver Secured Cash Rewards Credit Card and the Discover it® Secured Credit Card.
The Capital One Quicksilver earns 1.5% cash back on all purchases (no matter where you buy them), and the Discover it® Secured card earns 2% cash back at gas stations and restaurants on up to $1,000 in combined purchases every quarter. (See Rates & Fees for the Capital One Quicksilver Secured Cash Rewards Credit Card) (See Rates & Fees for the Discover it® Secured Credit Card)
Remember, store credit cards can be limiting, so make sure you pick a credit card that will serve you, not the other way around.
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Can You Benefit From a Store Credit Card? originally appeared on usnews.com
Update 08/26/24: The story was previously published at an earlier date and has been updated with new information.
