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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, which 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.

How Do Store Credit Cards Work?

A store credit card is a card that can often only be used at specified (usually branded) locations. The card is typically designed to help frequent and loyal shoppers earn cash back, rewards or discounts every time they make a purchase with that retailer, either online or in-person. Just like other credit cards, you will get a monthly statement and bill outlining your purchases. You will need to pay off the monthly balance in full every month to avoid paying interest.

Compared to other credit cards, store cards tend to come with high interest rates, typically 15%-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 instead, even if it doesn’t come with rewards. Store credit cards also come with lower spending limits compared to traditional cards. Use this credit card calculator to see what your options are for paying off credit card debt.

There are several different types of store credit cards, including closed-loop or open-loop cards. 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 a variety of participating stores and brands, such as those from Visa or Mastercard. This opens up the card to dozens of popular and recognizable stores and brands, such as grocery stores, restaurants and movie theaters.

It usually only takes a few minutes to apply for a store credit card. 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 score, the lower the interest rate usually is.

Instant issue store credit cards are handed out on the spot, which means the retailer probably isn’t looking at your credit score. These cards usually come with steep interest rates, so use caution if the retailer is ready to hand you a card without first checking your credit score. Other cards offer what’s known as deferred interest, which means you don’t have to worry about paying interest for the first few months. This gives you more time to make your first payment, but these kinds of cards usually come with high interest rates. Be sure to pay off the remaining balance in full before the interest kicks in.

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 much you will actually 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’re thinking about spending more money at the store to rack up points or discounts on the card, make sure you’re not spending more than necessary. It may be tempting to shop exclusively at stores where you can earn rewards and points, but if it may not be worth it if the cost of the item is higher than competitors or other stores.

Is It Worth It?

Lots of store credit cards will give you a steep discount on your first purchase. For example, signing up for a card can help you save as much as 15% or 20% off everything in your cart. Sounds pretty great, right? This can be a great way to save money on large, one-time purchases, such as a new flatscreen TV, home appliance or that leather jacket you’ve had your eye on. However, you need to make sure you can 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’ve been thinking about making a large purchase on credit to spread out your payments over several months, a store credit card can help you save money upfront. Again, compare the interest rate on the store credit card to a traditional credit card or personal line of credit to make sure you’re getting the best bang for your buck.

Building Credit

If you want to build your credit score, store credit cards aren’t usually the best way to go.

The best way to build up credit is to start using a low-interest credit card and keep your balance as low as possible. Paying off your balance on time will show that you are responsible with your money. You also need to confirm with the card issuer that these payments will be reported to the credit bureau, so they count towards your score.

There are only certain situations where it makes financial sense to use a store credit card. When it comes to everyday spending, most of the time 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 that’s loyal to a certain brand, signing up for a card can be beneficial. When it comes to nonessential purchases like clothes, drinks and entertainment, always remember to spend within your means. To get the most out of your credit card rewards be sure to do your research and always read the terms and conditions so you can weigh the benefits of the rewards compared to fees, interest rates and other costs.

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