Wednesday, Nov. 27, 2019 | 2 a.m.
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During the holidays, consumers are inundated with store credit card offers. Also known as retail cards, the sales pitch can seem great: stores provide upfront discounts just for applying, low-rate financing options for larger purchases, and cash-back or rewards points going forward. "Retailers will incentivize their cards with initial benefits and, in many cases, there are advantages to signing up. However, over the long term, using store credit can also pose problems," said Nicole Cypers, Vice President of Public Relations at America First Credit Union. Here's a look at some pros and cons.
What are store cards?
Many retail cards have one-time discounts and ongoing rewards. They typically come in two types: closed-loop and open-loop. A closed-loop card can only be used at the specific store that issued it. Open-loop cards are co-branded with major credit networks, such as Mastercard or Visa, and can be used wherever those cards are accepted. Some stores issue both options, so be sure you know what you're getting if you accept an offer.
Pros of Store Credit Cards
Discounts: Sign-up discounts are a primary reason people apply for retail cards. In some cases, you'll get 10% to 30% off your first purchase, which can be particularly valuable for big-ticket items like appliances and electronics. If the initial savings are substantial enough, it may justify signing up as long as you're careful with the card in the future.
Cardholder benefits: The perks that come with retail cards vary, but often include free online shipping, extended return windows and redeemable points. Depending on how often you shop at that store, these benefits may be worthwhile.
Qualification: Qualifying for a store card is generally an easier process than seeking a non-retail credit card. For those with less-than-stellar credit, getting such a card and using it appropriately can build a better score. Open-loop cards have the same qualification process as the co-branded credit network, which can be more stringent.
Cons of Store Credit Cards
High and deferred rates: Retail cards tend to have much higher interest rates, so if you're not going to pay the entire balance each month, this could be a major disadvantage. "Regardless of the card, if you're carrying a balance from month to month, the rewards and discounts aren't worth it," Cypers said. Further, many of these cards have introductory 0% APRs with deferred interest, meaning you'll be responsible for retroactively paying high interest if there's any balance at the end of the introductory period.
Lower limits: Low-limit cards can negatively affect your credit score. "It's generally recommended that you only use around 30% of your available credit per month. Going beyond that—especially to more than 50% of your limit—can have credit repercussions," Cypers said. "If your limit on a retail card is $1,000 and you consistently spend more than $300 every month, your credit score can drop."
More spending: Store cards can encourage impulse shopping and overspending. "Retail cards are designed to create loyalty, which makes you less likely to shop around for better prices. In addition, discounts and promotions can trigger overspending and buying things you wouldn't have purchased otherwise," Cypers said. If you tend to overspend or are easily swayed by discounts, a retail credit card may not be for you.
