Are Store Credit Cards Worth It?

It's hard to avoid store credit cards. Virtually every major retailer now offers one -- if not two. They're pitched with the promise of an immediate discount, plus cash back or other credit card rewards on your store purchases for as long as you have the card.

But just as the best auto loan is rarely found on the lot, the best credit cards are rarely offered in stores. In fact, even the best store credit cards tend to pale in comparison to the typical general-purpose credit card -- and some store cards are downright predatory.

So, are store credit cards worth it? Below, we'll explain the ins and outs of store credit cards, dive into those tempting 0% intro APR financing offers, and take a look at if/when store credit cards may be worthwhile.

How store credit cards work

Two main qualities separate store credit cards from traditional cards: where you can use them, and where you can redeem rewards.

Card can only be used at the store: The main thing that sets store credit cards apart from traditional "general-purpose" credit cards is where you can use them. Most store credit cards are closed-loop cards, meaning they can only be used at the retailer that issues them. For instance, your department store credit card can only be used in that department store or on its website.

In contrast, non-store credit cards are open-loop, so they can be used anywhere the network -- Visa, Mastercard, American Express, or Discover -- is accepted. If you swipe a closed-loop store card somewhere other than the issuing retailer, the purchase will get declined, because the card networks won't recognize the card as a valid payment option.

Rewards can only be used at the store: The card itself isn't the only thing of limited use. Unlike the cash back or points you earn with a regular open-loop card, the rewards you earn with store credit cards typically operate in the same closed loop as the store cards themselves. This means you'll only be able to redeem your rewards towards purchases via the retailer that issued the store card.

Other than where you can use a store card and its rewards, there aren't major differences between store credit cards and general-purpose credit cards. Applying for a store card involves the same hard credit inquiry and credit check as applying for a regular card. Once you're approved, your payment history and card balance are reported to the credit bureaus, just as with any other credit account. You'll also be charged interest if you carry a balance past your due date (and store credit cards have notoriously high interest rates).

What's in it for retailers?

Retailers want to get store credit cards in your wallet for a few reasons.

First, loyalty -- if you have a store card that earns retailer-specific rewards, you're more likely to shop with that store. Plus, since your store card's rewards can only be used with that retailer, you'll have to come back to redeem your rewards, making additional purchases more likely.

Another reason retailers push store credit cards is to get around the expensive processing fees they pay on ordinary credit cards. When the payment is handled in-house, the retailer doesn't pay a network to process it.

Last -- but hardly least -- a card issued by a store is a data collection tool, helping the store figure out better ways to market to you. What you buy, how and when you shop -- all of this information is analyzed by the retailer to determine how to get you to spend more.

The real cost of a store credit card's discount

After ringing up your items, a cashier says you'll receive a 10% discount on everything you're buying -- if you apply and are approved right then and there. If you have a little extra time, the offer can be pretty compelling.

The only problem? With most store cards, you're giving up a lot for very little. The real cost of that 10% discount could wind up being a significant decrease in your credit score.

To start, an application can affect your credit score. The card issuer pulls your credit to see if you qualify, resulting in a hard credit inquiry on your credit report. Too many hard inquiries in a short period (one to two years) can decrease your credit score and negatively affect your ability to get approved for other forms of credit. Hard inquiries can hang around on your credit report for up to two years whether you're approved for the card or not.

There will also be other impacts if you're approved. Store credit cards are treated just like regular cards when computing your credit score, and your new card gets included in your average account age and your utilization rate.

The fine print on that 0% financing offer

In addition to one-time discounts and potential rewards, a major selling point for many store credit cards is the 0% intro APR financing offer, as in, "Buy now, pay no interest through 2022!"

These offers are attractive, particularly for big-ticket purchases like electronics, furniture, or appliances, because you pay off the purchase over time -- potentially without paying a dime in interest. Breaking a $5,000 purchase into 12 monthly payments of roughly $417 can make that new bedroom set seem like a no-brainer.

But you should be mindful of the fine print and the potential pitfalls of using store credit cards as a 0% intro APR financing solution. Here are a few things to consider.

Deferred interest

Many store cards prominently advertise 0% interest for a certain period, but there's often a catch in the fine print: deferred interest. With a deferred-interest financing offer, you have to pay off every last cent of your financed balance before the end of the promotional period, or you're charged interest on the full amount.

For example, imagine you use a store card's financing offer to make a $1,000 purchase. You pay off $750 of that $1,000 during the 12-month 0% intro period. When the 12 months are up, instead of owing interest on just the $250 balance you have left, deferred interest means you owe interest on all $1,000. And given the high rates charged by most store cards, the cost can be astronomical.

Unlike store credit cards, general-purpose credit cards rarely include deferred interest in their 0% intro APR offers. Instead, when the introductory period ends, interest is charged on only the remaining balance going forward.

Short 0% intro periods

Another downside to store credit cards' 0% financing deals is the length of the promotional period. Most store cards offer only six or 12 months to repay your purchase. Considering you need to pay off every cent to avoid deferred interest, the short repayment period could be costly.

On the other hand, many of the best 0% intro APR cards offer that 0% intro rate on purchases for 15 months or more. The Capital One Quicksilver Cash Rewards Credit Card, for instance, offers an excellent 0% intro APR for 15 months on purchases and balance transfers, plus a new cardholder cash spend bonus. Few store cards come close to matching that.

Limited use

A 0% intro APR is only valuable if you can actually use it. Sure, it may be advantageous to score a 0% intro APR on a hardware store's card to pay off a new refrigerator over time -- but how many new refrigerators do you need? The same closed-loop restrictions that make store credit cards of limited purchase value also makes that financing deal of limited value.

At the same time, promotional offers on general-purpose credit cards allow you to take advantage of the 0% intro APR on all of your new card purchases, regardless of where you shop. With a traditional credit card, you could pay off that refrigerator purchase over time -- while also enjoying no interest on your gas and groceries.

When store cards make sense

It's probably clear that we aren't generally fans of store cards. That's because, as a rule of thumb, we think you get more value out of a general-purpose credit card than a store card, assuming you're willing to put in a little effort to shop around.

That said, there are two cases in which it may make sense to get a store card.

1. When you have poor or limited credit

While there are many reasons store credit cards aren't as useful as regular credit cards -- closed-loop restrictions, low credit limits, high APRs -- they often have a positive: Most store credit cards are easier to get approved for than the average open-loop credit card.

Store cards typically carry higher APRs, lower credit limits, and help retailers save money in swipe fees. For all these reasons, retailers and their bank partners are generally more flexible on who they approve than open-loop issuers. So, when used responsibly, a store card can be a good way to rebuild your credit history.

Of course, a store card isn't a "gimme." No credit card offers 100% approval odds. But all things considered, an applicant is more likely to get approved for a randomly selected store card than a randomly selected general-purpose credit card. (If you're looking for an almost 100% guarantee of approval no matter your credit score, a secured credit card is the way to go.)

2. If you do significant shopping with a retailer

It can make sense to open a store credit card if you shop at one store frequently, but you need to spend a lot of money each year to justify it. Some of the best store credit cards offer unlimited 5% cash back on your spending, which is far better than you can get on most regular cash-back cards.

For example, the Prime Visa offers 5% cash back for Prime members, which is really tough to beat if you're loyal to the e-commerce site. Likewise, the Target RedCard is a perennial favorite among store card users, because it offers a 5% discount on purchases made in store or online.

Ultimately, whether it's worth it to apply for a store card depends on your average annual spending. If you spend $1,000 per year on Amazon's card that offers 3% cash back, you'd earn $30 in rewards. That's only $15 more per year than you'd earn from any of the plethora of 1.5% cash back cards on the market -- and you won't need a costly Prime account with the regular cash back card.

Of course, if you spend, say, $10,000 per year at one retailer, then opening a store card may be the closest thing to a no-brainer. A 5% rewards yield would net you $500 in rewards per year, $350 more than you'd earn with a typical cash-back card that only offers 1.5% on purchases.

There are no one-size-fits-all credit cards

Are store credit cards worth it? In the end, the answer is maybe.

Everyone's financial and credit situation is different. The same credit card that saves your neighbor hundreds a year may not work for you -- and vice versa. Store credit cards are no exception to this rule.

Choosing a new credit card of any kind, including store credit cards, should involve careful consideration. As much as an issuer or retailer may want to encourage a heat-of-the-moment sign-up, few discounts are so good that you shouldn't ponder the impacts before you apply.

Still have questions?

Some other questions we've answered:

• What are the best store credit cards?
• What are the best secured credit cards?
• What kind of credit card types are there?