When To Open a Store Credit Card — and When Not To

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Updated on Wednesday, July 24, 2019

You’ve likely been offered the chance to apply for a store credit card while having your items rung up at a retailer’s counter, or while shopping online. Often, these offers come with the benefit of getting a good chunk — say, 10% or more — off your initial purchase.

So is it a no-brainer to take the discount and sign up?

Not necessarily. There are certainly advantages to getting a store credit card, including that initial promotional discount, ongoing rewards and the ability to use your new card as a credit-building tool. However, the downsides include low credit limits, high interest rates and deferred interest.

Here’s some info to help you decide whether getting a store credit card is the right choice for you.

What are store credit cards?

A store credit card typically allows consumers to receive benefits and rewards for shopping at a specific retailer.

For example, if you get a credit card from your favorite clothing store, you may get 10% or 20% off your first purchase, then continue to receive perks as a cardholder, including continuous discounts when you shop there or at related retailers, access to special promotions and events, and even birthday gifts.

There are two main types of store credit cards — those that only can be used at a specific store (also known as closed-loop cards), and those that can be used at any number of retailers (open-loop cards). Open-loop cards are typically co-branded with major card networks, like Visa or Mastercard.

Gap, for one, offers a GapCard that can be used only at Gap and Gap Factory stores, while a Gap Visa card that allows you to earn rewards at any store that accepts Visa, which will ultimately can be redeemed for a Gap purchase.

Reasons to open a store card

  • Easier approval odds: If your credit score isn’t stellar, it can be easier to be approved for store cards than for other cards. “Retailers want to sign up as many people as possible for their credit cards, because they know if someone signs up for their card, they’re much more likely to shop regularly at that store,” said Matt Schulz, credit analyst for LendingTree, which owns MagnifyMoney. However, you may need a higher credit score to qualify for a co-branded card. “Often, if you apply for a co-branded store card and get denied, the store will automatically consider you for the store card, too,” Schulz said.
  • Good for credit-building: Obtaining a store card can be one way for people with low credit scores, or no credit at all, to improve or start building their credit. Once you’ve been approved for the card, using it responsibly can help you boost or build your credit, as your purchase and payoff activity will be reported to the credit bureaus.
  • Rewards: As previously noted, you can be rewarded for your use of store credit cards, getting perks that may go beyond the initial discount. If you shop a lot at a particular store, you may benefit from their card.

Reasons a store card can be risky

  • High interest: According to LendingTree, the average rate on new credit card offers is approximately 19.29%; however, LendingTree also noted that the average rate offered for new store card offers, in particular, is much higher — nearly 25%. If you don’t pay off every purchase when your bill is due, you can really rack up the interest-related debt. “Store card APRs are very high because issuers know that making the card available to folks with crummy or thin credit means greater risk for them,” noted Schulz. “Higher APRs are a way for the banks to protect themselves against that risk.”
  • Deferred interest: You may be familiar with the 0% promotional periods offered by traditional credit cards — that is, a time during which you can carry a balance without paying interest. Deferred interest offered by a retailer might seem like the same thing, but it’s not. Deferred interest periods do indeed allow you to carry a balance without paying interest, for a time. However, when that period ends, if you haven’t paid off the card in full, you’ll be on the hook for paying interest not only for the balance that remains, but for the entire original purchase.
  • Low credit limits: While store cards can help you build your credit, their often-low credit limits may be a negative for your utilization ratio if you do not have many — or any — other cards. Your utilization ratio is the amount you owe on your cards compared to your total credit limit, and is an important part of your credit score. It’s generally recommended that you keep a utilization ratio below 30%. For example, if you have a store credit card with a $500 limit and you charge $250, your utilization ratio at a hefty 50%, which could ding your credit score. (If you do have other cards, however, getting more credit can be good for your utilization ratio, as your credit score considers individual card utilization as well as the utilization used across all your cards).
  • Limited use: If you get a closed-loop card, you are limited to only being able to use the card with that specific retailer.
  • Could trigger your shopaholic tendencies: If you’re prone to making frivolous purchases, getting a store card may prompt you to spend more to try to get the rewards offered. It’s never a good idea to buy items you don’t really need simply to get rewards, as you’re still spending money you didn’t have to in the first place.

How to tell if the discount is worth it

Some people might sign up for a store card just to get that promotional discount, with no plan to use the card again after their initial purchase. This may be a good move — if you pay that card off right away. However, if you carry a balance, any discount you receive will be negated by interest charges you’ll incur.

“The APRs are just so high that the math can work against you in a big hurry, even if you get a good discount initially,” Schulz said. “It doesn’t take an accountant to understand that paying 25% to save 15% isn’t a good deal.”

Let’s look at an example. Say you make a $300 purchase and get 15% off. That’s $45 off, bringing your bill down to $255. Sounds good, right?

Now let’s say the APR on the card is 25%, and, instead of paying off that balance right away, you make monthly payments of $15. Over the time it will cost you to pay off your card (22 months), you’ll pay $63.09 in interest, wiping out your initial discount.

Bottom line: It’s best to pay your card balance off right away, or at least make larger monthly payments, to reap the benefits from that promotional discount.

What’s the best store credit card to get?

If you’re considering a store card, look for those with no annual fee, as low an APR as possible and good ongoing perks. If you can qualify for a co-branded card, their flexibility can often help you rack up rewards faster. Overall, more general rewards cards may be a better bet than individual store cards, if you can qualify.

Schulz recommends you don’t jump into applying, or feel pressured by a store employee to get a card.

“Take a flier, read about the card at home and then, if the card still sounds good to you, apply the next time you go to the store,” he said. “Chances are all the same perks will still be in effect and you’ll be making a much more informed, less pressure-filled choice.”