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Rewards Credit Cards

What to Know Before You Apply for a Store Credit Card

Store credit cards work similarly to traditional credit cards, and in some cases, there's no difference at all. But with many retail cards, it's important to understand how the features can vary and what that means for you.

The primary ways store credit cards differ from traditional cards include acceptance, eligibility requirements, interest rates and credit limits. Here's what you need to know.

Can You Use Store Credit Cards Anywhere?

There are two types of store credit cards: closed-loop and open-loop. Closed-loop retail cards are more common and only allow you to use your credit card with that retailer and, in some cases, its other brands and partners. This can make it difficult to use the card regularly unless you shop at the retailer often.

Open-loop store cards, on the other hand, use one of the major payment networks (typically Visa, Mastercard or American Express). This allows you to use the card with the specific co-branded retailer as well as anywhere else that accepts the payment network shown on the card.

If you're considering getting a store credit card, check to see where it's accepted. In some cases, you may have the choice between a closed-loop and open-loop card. If you have the option, pick the card you can use more broadly so you have extra flexibility.

How a Store Card Can Affect Your Credit

In general, a store credit card affects your credit the same way a traditional card does. When you apply for a store card, the card's issuer will typically run a hard inquiry on your credit report, which can temporarily knock a few points off your credit score.

If the card issuer reports your activity to the three national credit reporting agencies—Experian, TransUnion and Equifax—responsible use and on-time payments can help improve your credit score.

On the flip side, missing payments and racking up a high balance could have an adverse effect on your credit score. This is especially the case with store credit cards because they typically offer lower credit limits than traditional credit cards.

For example, let's say you qualify for a $400 credit limit on a store card and a $4,000 limit on a traditional card. If you put $200 on each card, your credit utilization rate (your balance divided by your limit) would be 50% on the store card and 5% on the other card. Credit experts generally recommend keeping your utilization rate below 30%, and the lower, the better.

After payment history, credit utilization is the most important factor in your credit score calculation. Because a lower credit limit creates a greater risk of having a high utilization rate, you'll need to be more careful with store credit cards and make an effort to keep your balance low.

What Are Some Other Differences to Consider?

In addition to lower credit limits, retail cards also typically charge higher interest rates than regular credit cards. With a retail card, you'll need to be extra careful to spend only what you can pay off each month so you don't end up with expensive interest charges.

Store credit cards also typically have different incentives than other rewards credit cards. Many stores offer an instant discount on goods you're purchasing if you sign up for the card at checkout. You'll also usually get ongoing benefits specific to the store, such as exclusive access to sales, free shipping, special discounts and more.

Some retail cards offer additional rewards, but they typically aren't competitive with regular rewards credit cards, especially when it comes to purchases you make elsewhere, if allowed.

While these features can come in handy if you already shop at a specific retailer often, they might also encourage you to spend more than you normally would.

Are Store Credit Cards Worth It?

It can be tempting to apply for a store credit card to qualify for a one-time discount, especially on a major purchase. But before you do, take some time to consider whether a store card is worth it for you.

For starters, applying at the cash register may be the worst time to make such an important financial decision. In addition to being put on the spot, you may be lured by the instant gratification of the discount, both of which could cloud your judgment.

Instead, take some time to consider how often you shop at the retailer and whether you'd be able to control your spending with a store credit card. If you're an irregular shopper with the store, it likely doesn't make sense to open a new credit account you'll rarely use. And if all the discounts, sales access and other perks are too tempting, you'll likely save money staying away.

If you're looking to get a lot of value regardless of where you shop and don't think a store card is a good fit, consider a regular rewards credit card instead. Depending on which one you choose, you could get much more upfront value via a sign-up bonus and possibly even an introductory 0% APR promotion, plus ongoing value through rewards and other perks.

Getting a store credit card could make sense, however, if you're relatively new to credit or your credit score isn't in great shape. Many retail cards, especially closed-loop cards, have less stringent credit requirements, so they could offer a solid path toward establishing a good credit history if used responsibly.

Also, if you do shop at a specific retailer regularly and can't get better value on your purchases there with a traditional credit card, that store's credit card may be worth considering.

Avoid Applying for Any Credit Card on a Whim

Whether you're at the cash register, at the bank or on your computer, avoid applying for a credit card without thinking it through carefully.

Before you do anything, check your credit score to see where you stand and whether you have a good chance of getting approved. While many retail cards are available if you have limited or bad credit, most of the best rewards credit cards require good credit or better, which means a FICO credit score of 670 or higher.

Also, take some time to compare several credit card options before you pick one. For instance, one may offer a bigger introductory bonus, but another may provide better ongoing rewards rates that will give you more value over time.

As you shop around and consider which credit card is best for you, you'll have an easier time avoiding cards that aren't the right fit or could end up causing you to leave value on the table.

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