5 min read
The Good and Bad of Store Credit Cards
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If you’ve ever been to a department store or chain retailer, the salesperson probably asked you if you wanted to open a store credit card. A store credit card is like a normal credit card except that, in most cases, you can only use it at participating stores and businesses. Some of the biggest chain outlets and retailers, such as Target, Home Depot, Walmart, Macy’s and other clothing retailers offer this option.
But how do these cards work? And can they actually help you save money? Let’s find out.
LESSON CONTENTS
How do store credit cards work?
A store credit card can often only be used at specified specific locations. The card is typically designed to help frequent and loyal shoppers earn cash back, rewards or discounts for every purchase with that retailer, whether online or in person. Like other credit cards, you receive a monthly statement and bill outlining your purchases. You must pay off the monthly balance in full every month to avoid paying interest.
Compared to other credit cards, these cards typically have high interest rates around 15% to 25%. Even with a reward or discount, the interest rate can be prohibitive for some people. If the rate is too high, you might be better off finding a credit card with a lower interest rate, even if it doesn’t come with rewards. Store cards usually have lower spending limits than traditional credit cards. Use this credit card calculator to see what your options are for paying off credit card debt.
Store cards are either closed-loop or open-loop. Closed-loop cards must be used at that specific store or chain of stores. For example, the Target Red card can only be used at Target, but you’re free to shop at any location in the U.S. Open-loop cards can be used at participating stores and brands, such as those from Visa or Mastercard. Open-loop cards can be used at dozens of popular stores and brands, such as grocery stores, restaurants and movie theaters.
Many brand-name retailers team up with major credit card issuers to create signature financial products, especially if these companies share a large pool of customers. In some cases, the greater the rewards, the more expensive it is to use the card. Some store cards charge steep annual fees, so make sure the savings exceed the added expense of using the card.
Applying for one of these cards usually takes a few minutes. In most cases, the store will want to look at your credit score before issuing you a card. They will assign you an interest rate based on your credit history and financial situation. The better your credit score, the lower the interest rate.
Instant issue store cards are issued immediately, meaning the retailer probably won’t check your credit score. Use caution when seeking this type of card, as they usually have much higher interest rates. Other retailers may require you to apply for the card the same as you would a traditional credit card. In most cases, the harder it is to get the card, the better the rewards.
Some cards offer what’s known as deferred interest, which means you don’t have to worry about paying interest for the first few months. The deferred period gives you more time to make your first payment, but these cards usually have high interest rates. Be sure to pay off the remaining balance in full before the interest kicks in.
Store credit card rewards
Store-issued credit cards are also known as rewards cards because most people use them to get rewards for shopping at the same store or company. There can be a lot of perks to using these cards, but you will need to meet specific requirements to receive them.
The most common reward is a discount on products or services, such as gas, groceries and all in-store or online purchases. Some companies use a points system allowing you to rack up points with every purchase. Points can be exchanged for discounts, gift cards or free goods. You may also get a sign-up bonus just for opening the card.
Not all cash back rewards work the same way. Some are automatically applied at checkout, while others are only paid out once a year, so read through the terms and conditions carefully.
Things to consider before signing up for a store credit card
How often will you use it?
One of the first things to consider is how often you will use the card. Think about how much you normally spend at the store to see if the card is worth your time. If you continue to spend money like normal, see if you will qualify for the rewards.
If you are considering spending more money at the store to increase your points or discounts on the card, ensure you’re not spending more than necessary. It may be tempting to shop exclusively at stores where you can earn rewards and points, but it may not be worth it if the cost of the item is higher than competitors or other stores.
Is it worth it?
Many retailers give cardholders a steep discount on their first purchase, which can be a great way to save money on large, one-time purchases, such as a new flatscreen TV, home appliance or a leather jacket. For example, signing up for a card can help you save as much as 15% or 20% off everything in your cart. However, you must pay off the item in full as soon as your first bill arrives, or you’ll have to pay interest, which may counteract the discount.
If you want to make a large purchase on credit to spread out your payments over several months, a store credit card can help you save money upfront. Always compare the interest rate to those of traditional credit cards and personal lines of credit to ensure you’re getting the best bang for your buck.
Building credit
To build your credit score, consider using a low-interest credit card instead. Make regular payments and keep your balance as low as possible to increase your score over time. Paying off your balance on time will show that you are responsible with money. You must also confirm with the card issuer that these payments will be reported to the credit bureau so they count towards your score.
What are the best store credit cards?
Nearly every major retailer offers some type of in-store credit card. Companies often use these cards to convince customers to spend more money at specific retail locations, and the potential discounts vary dramatically from one company to the next. Here’s a list of some of the best and most widely used retail-specific credit cards in the country and how they can help you save money:
Capital One® Walmart Rewards™ Mastercard®
If you shop at Walmart, the largest U.S. retailer, the Capital One Rewards credit card is a good option. You get 5% cash back on all Walmart.com purchases and 5% cash back in the first year on in-store purchases made using Walmart Pay with 2% cash back after the first year. The card is open-looped, making it valid at other participating stores and businesses including anywhere Mastercard is accepted. You will also get 2% cash back on travel and restaurants and 1% cash back on all other purchases. Plus, there is no annual fee.
You can redeem your cash back rewards in the form of a statement on your credit card or by putting them towards a purchase. They can also be used for travel when you book through the Capital One website.
The major downside is that this card comes with a high variable annual interest rate that ranges from 17.9% to 28.99%.
Amazon Prime Rewards Visa Signature Card
This card gives you unlimited 5% cash back on all Amazon.com and Whole Foods purchases, 2% cash back at restaurants and gas stations, 2% cash back on local transit and commuting (including rideshare), and 1% cash back on all other purchases. It is also open-looped and can be used anywhere Visa or Mastercard are accepted. There is no annual fee.
But the high ongoing APR will make it hard to keep a balance on the card. It comes with a variable interest rate of 18.99% to 26.99%. The card is also only available to Amazon Prime members, which costs around $15 a month, but you will get free two-day shipping and access to original content on the Prime Video streaming service.
Target Circle™ Card Credit Card
The Target Circle Card is giving Walmart and Amazon a run for its money. You will get 5% off all eligible purchases at Target in store and online, an additional 30 days for returns and free shipping on most items. The discount is automatically applied at check out when you log into your account. You also get exclusive extra benefits. There is no annual fee.
Target offers a Mastercard version of the Circle Card, so consider signing up for that instead if you want to get cash back on non-Target purchases. It comes with a high variable APR at 29.95%, so be sure to pay it down before the bill arrives. You will also be charged a $1 minimum in interest for every month that you carry a balance.
Lowe's Advantage Card
Need to fix up your house? Consider signing up for the Lowe’s Advantage Card to save money on home improvement purchases. You get an unlimited 5% off eligible Lowe's purchases, but if you decide to opt out of the traditional rewards, you will get six months special financing with a low APR as long as you make a $299 minimum purchase. Or you can get 84 months of fixed monthly payments with a reduced APR with a $2,000 minimum purchase.
The low monthly APR will help you pay off major purchases without taking on as much interest, but the interest rate may still be higher than what you would get with a traditional credit card. This card is usually best used when you sign up for the 5% discount. Without the special financing, the card comes with a variable 26.99% interest rate. It will also collect deferred interest if the promotional balance is paid off in time. The card is closed loop and can only be used at Lowe’s.
Costco Anywhere Visa® Card by Citi
If you have a Costco membership, you may be eligible for the Anywhere Visa Card by Citibank. You will get 4% cash back on eligible gas and EV charging purchases (up to $7,000 in spending annually, then 1%), 3% cash back on restaurants and travel, 2% cash back on all Costco purchases and 1% cash back on all other purchases.
The card is open-looped and can be used anywhere Visa is accepted. You also don’t have to have an account with CitiBank to get the card. But the Costco Membership costs around $60 a year even though it gets you in-store discounts. The cash back rewards are also less flexible than those of other store cards. They are paid only once a year at the end of the February billing cycle, so don’t expect to get a discount at check out unless the item is on sale.
If you do a lot of driving and already shop at Costco, the potential savings on gas can make this card well worth the added expense. You will also need a good credit score to qualify. There is no annual fee and the variable APR hovers around 19.99%.
Verizon Visa® Card
If you are a Verizon customer, the company’s Visa card comes with an excellent rewards package. You will get 4% cash back on grocery store purchases, 4% back on gas, 3% back on dining purchases, including takeout and delivery, 2% back on Verizon purchases and 1% back on all other purchases.
The deals start to rack up if you are a Verizon customer. If you use your card to pay your Verizon bill every month, you will earn up to $100 in credit over the first 24 months ($4.17 per month). Sign up for automatic paperless billing to get a $10 per month discount per line for up to 12 lines. You will also get two free TravelPass days per calendar year, a $20 value.
There is no annual fee. It is open-looped and can be used anywhere Visa is accepted. However, it comes with a relatively high variable APR, which ranges from 26.24% to 30.24% for new customers. If you upgrade to the Verizon Visa Signature Credit Card, you may be eligible for a lower interest rate.
In certain situations, it makes financial sense to use a store-issued credit card. With everyday spending, most times it’s better to get a card with a low interest rate from a reputable financial institution. You should avoid using the card more than necessary.
If you’re a frequent shopper who’s loyal to a certain brand, signing up for a card can be beneficial. Always remember to spend within your means when purchasing nonessential purchases like clothes, drinks and entertainment. To get the most out of your credit card rewards, be sure to do your research and always read the terms and conditions to weigh the benefits of the rewards compared to fees, interest rates and other costs.
PLEASE NOTE: The information presented in this article is intended to be used for informational purposes only and should not be considered advice. Consult a financial, tax or legal professional to see if the information provided in this article is suitable for your situation.
Information stated is current as of the time of recording and may be subject to change in the future.
Third party products and services mentioned in the article are done so for informational purposes only and should not be considered endorsements or affiliations unless stated otherwise.
Any opinions of guests or third parties in the article are strictly their own and do not represent Ent Credit Union.
Ent Credit Union is insured by the NCUA and is an equal housing opportunity lender. Visit Ent.com for more information.
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