Pros and cons of store credit cards
Sometimes the offer made at the register for a sizable sales discount in exchange for opening a store credit card is too tempting to pass up.
Store credit cards, even though limited in use, come with a number of perks, rewards, free online shipping, exclusive sales access, and other benefits that are attractive in the eyes of loyal shoppers.
Americans find the advantages so enticing that interest in store credit cards is gaining appeal and traction. Forty-four percent of Americans say they’re at least somewhat likely to apply for a store card during the holiday shopping season, compared with 32% in 2019 and 24% in 2018, according to a recent LendingTree survey.
Just because retailers are providing shoppers with the bait doesn’t mean store credit cards are right for everyone and are appropriate for their financial habits.
“If you regularly carry a balance, you probably shouldn't have a store credit card because they're so expensive,” Matt Schulz, LendingTree’s chief credit analyst, told Cashay. “If you pay that balance off every single month, then they can actually be okay.”
Store credit card rewards have “traditionally lagged behind general-purpose credit cards and they still basically do,” according to Schulz, who cautions against shoppers getting hoodwinked by rewards.
Here’s what else to consider.
Good for mending poor credit or building credit: Since store credit cards are typically less selective than general-purpose credit cards when it comes to approving cardholders, it’s easier to get one if you don’t have perfect credit.
There is a catch, however. A store credit card will only strengthen credit if you pay the bill on time every month and you don’t spend more than the credit limit. Late payments and maxing out credit lines hurt the credit history you’re working to build.
On the spot savings when you sign up: But it’s likely a one-time-only occurrence. Schulz explained that savvy spenders can leverage short-term discounts or special financing when buying big-ticket items or making big purchases.
High interest rates: Store credit cards come with rates that are high “even by credit card interest rate standards,” Schulz said.
They can only be used at a particular store: These are called closed-loop credit cards. Compared with general-purpose credit cards that almost always come with better rewards, interest rates, and terms, it’s in the best interest of the cardholder to spend with one of these instead.
Vague financing phrases: Research terms and phrases like “deferred interest” in the fine print before opening a card, especially if the introductory offer includes 0% APR for a certain period.
For example, if a balance isn’t paid off within the introductory period, “you're going to get hit with a bill for all of the interest that would have accrued going all the way back to the purchase date,” Schulz said.
Incentives to keep spending: Retailers are cunning and have designed store cards to get you to shop more by extending premium rewards and perks to high-frequency shoppers and ensnaring them in a spending spiral.
“For people who are devoted loyal shoppers to a specific retailer, those cards can work for you,” Schulz said. “But even then, you still need to make sure that you're paying that off in full.”
The bottom line
For certain spenders, store cards can be positive so long as an account holder is clear on the terms before signing up.
“So many times, these cards are signed up for under pressure situations,” Schulz explained. “People make bad decisions when they're under pressure, and they don't understand what they're getting into.”
Schulz’s advice for those considering a new store credit card is to “do your homework before you sign up” because offers come with “really important nuances” that potential cardholders should be aware of or else “these cards can end up costing them a fair amount of money.”
Stephanie is a reporter for Yahoo Money and Cashay, a new personal finance website. She can be reached at email@example.com. Follow her on Twitter @SJAsymkos.
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