You approach the checkout counter of your favorite store, and the cashier asks whether you have the store's credit card. When you say no, the cashier begins to explain just how much you'd save on your current purchase by signing up, and you wonder whether it would be a smart move.
Unfortunately, there isn't a cut-and-dried answer to this question. There are a number of factors to consider, including how frequently you shop there, the value of the rewards, and your reasons for wanting the card. Here's what you need to know about store credit cards before you sign up for one.
The benefits of store credit cards
Many store credit cards enable you to earn reward points that you can then put toward future purchases at that chain or any of its partner stores. Every time you buy something at that store with your store card, you're given a certain number of rewards points, usually 1 point per dollar spent. When you've accumulated enough points, you can redeem them for store gift card codes that can be used online or in stores. The value of the points varies from card to card. You can figure out how much each point is worth by dividing the value of the reward by the number of points it takes to earn it. For example, say that for every 500 points you earn, you get a $25 credit toward future purchases. This means each point is worth about $0.05.
In addition, many store credit cards offer special perks to cardholders, including discounts, free shipping on online purchases, and possibly even a free item or two each year. If you shop at the store often, these perks alone may be worth signing up for the card.
Not all store cards offer all of these benefits. You'll have to check the card's website or cardholder agreement for specific details. But if your store card offers a $25 gift card for every $250 spent and you spend $2,000 at the store in a year, that could add up to $200 in rewards each year. Factor in extras like free shipping or the occasional 20% off coupon, and you could easily add another $25 to $50 to that, depending on how you shop.
Store credit cards are typically easier to get approved for than non-branded rewards cards, so they're a great option if you're trying to build your credit and you're having trouble getting approved for other cards. Most card issuers will report your payment history to the credit bureaus each month, so paying your bills on time can help to raise your credit score.
The drawbacks of store credit cards
Unlike non-branded rewards credit cards, which enable you to shop anywhere and redeem your points for a variety of rewards, most store credit cards can only be used at that particular store or one of its partners. This limits the utility of these cards unless you shop at that store frequently. Even regular customers may not be able to earn as many rewards as they'd like, because store credit cards often have a much lower credit limit than traditional rewards cards.
Before you sign up for one of these cards, it's a good idea to do the math and calculate how much you expect to spend at that store in a year. Look at how many rewards points (if any) that amount would earn you and then compare that to what you'd earn if you made the same purchases with a non-branded rewards credit card. For many people, a more flexible cash-back rewards credit card is the way to go, because there are fewer restrictions on how you earn and redeem rewards.
It's also important to read through the cardholder agreement, because some store credit cards are not very transparent about their rules. For example, some stores offer special interest-free financing periods to cardholders. What they don't tell you is that it's deferred-interest financing. This means as long as you pay the full balance within the designated time, you won't have to pay any interest. But if it takes you any longer than this, you will retroactively be charged all of the interest you would have paid since the purchase date, had you not had the special financing.
To make matters worse, store credit cards tend to have much higher interest rates than non-branded credit cards. This isn't an issue if you're diligent about paying your balance in full each month. But if you've been known to carry a balance, that store credit card could cost you dearly.
Say you purchase $1,000 worth of items on a store credit card with a 25% interest rate. Assuming you make the minimum $30 monthly payment, it'll take you 58 months to pay it off, and you'll end up paying $725 in interest. If you had put that purchase on a traditional rewards card with a 16% interest rate, it would only take 45 months to pay off, and you'd only pay $331 in interest.
Should you sign up for a store credit card?
Store credit cards may be a good fit if you're looking to capitalize on the special cardholder perks or to build or rebuild your credit. But if you're trying to maximize your rewards-earning potential, or if you've been known to carry a balance, a store credit card may do you more harm than good.