You can usually count on a store credit card offer nearly every time you make a purchase at a major retailer. Often, these store card applications include a one-time discount on your purchases, and rewards for your spending at the store year-round.
But are these store cards really a good deal? Sometimes. But often store credit cards are uncompetitive, and can even be a bad deal.
How store credit cards work
Stores don't actually offer credit cards, they merely partner with credit card issuers to put their name on a card in what is called co-branding. These store credit cards are not typically part of a larger payment network, which means that they can only be used for in-store or online purchases from that retailer.
However, some of the larger retailers offer co-branded cards that are part of a payment network such as Visa or Mastercard. Like other credit cards, you can usually avoid interest charges by paying your statement balances in full, or you can choose to carry a balance.
Store cards usually offer some sort of rewards or benefits. For example, a typical store card might offer you 3% to 5% back in the form of store credit, and those who have a store card will receive coupons and other exclusive offers in the mail.
Finally, store credit cards can act as a way to help customers finance their purchases and increase sales. Some store cards also come with interest free promotional financing, or deferred interest financing offers. This is why store credit cards are so common and why cashiers are so eager to offer customers an application. In fact, many retailers reward their employees when they can convince a customer to apply for their store card.
What can make a store credit card a bad deal
When a cashier asks if you would like to save money on your purchase today by applying for a store credit card, it can be difficult to say no. Before you're faced with this choice consider the following ways that a store credit card can be a bad deal:
- Store credit cards can have very high interest rates and fees. According to the Federal Reserve Bank's consumer credit statistics, the average interest rate for a credit card in the United States tends to be around 12-14%. Yet most store credit cards have interest rates that are around twice as high. And although nearly all store credit cards have no annual fee, these cards typically have higher fees and penalties for other things such as foreign transactions, cash advances, cash withdrawals and late fees. (See also: Best Low Interest Cards)
- Store credit cards can have uncompetitive rewards. A typical store credit card may offer you a substantial same-day discount to encourage you to apply for the card. But even those discounts are often available from coupons that are commonly available. Store cards can also offer you rewards for your purchases, but these are not that much different than a cash back card that you might find offered by a major card issuer. But more importantly, the rewards you earn from a cash back card can be used to pay for anything, which is always more valuable than the credit towards a future purchase that you usually receive from a store credit card. (See also: Best Rewards Credit Cards)
- Store credit cards can encourage irrational shopping behavior. From the retailer's perspective, a store credit card is a tool to increase customer loyalty. Once their customers have a store's card, it acts as an advertisement for the store that they see in their wallets each day. Retailers also count on the fact that store card holders will probably favor shopping at their store over others, if only to earn rewards on their store cards. And in doing so, shoppers might overlook better prices elsewhere. Always remember that you really aren't really earning 5% rewards if you end up paying 10% more for your purchases.
- A shopping trip really isn't the best time to make an important financial decision. Applying for any credit card is a decision that you shouldn't take lightly. You should always take the time time to research a credit card and understand its terms and conditions before submitting your application. When you've just finished your shopping and reach the cash register, it might be the worst possible time to study the terms of a store card, and compare it to different offers. When you're just trying to complete your purchase, and others are waiting in line behind you, it can create tremendous pressure to just gloss over an application and move on.
When a store card can makes sense
Typically, a store credit card is offered to people with a wider variety of credit profiles than most credit cards offered directly from the banks. This is why many people's first credit card is a store card. These discounts that these cards offer can also make sense when you know that you'll be spending a large amount at a particular store throughout the year, especially when you are able to avoid incurring interest and other fees by paying each statement balance in full and on-time. Finally, some store charge cards can offer 5% back in rewards, which is considered competitive.
Just because you can save some money on a purchase, it doesn't mean that applying for a store card will be a good deal. By taking the time to understand all of the advantages and drawbacks of a store credit card, you can make the right decision next time you are presented with an application at the cash register.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on November 16, 2017, and has been updated.