“Would you like to get a 20% discount on your purchase today with a store credit card?”
It’s a question you’re likely to hear at many a checkout counter every Black Friday, that infamous shopping day that follows Thanksgiving. (More and more, though, Black Friday is a multiweek affair.)
At some stores, it’s a question you’ll hear each and every time you shop, regardless of time of year.
What’s the right way to react to this all-too-common scenario?
This post explains the basics of store credit cards, looks at the impact they can have on your credit, and shows you how they compare to regular credit cards offered by banks, credit unions, and online lenders.
Most importantly, you’ll get the data you need to decide if that 20% discount is worth it.
What are Store Credit Cards?
Store-branded credit cards are a revolving line of credit that can typically only be used at the store which issued it. Examples of store credit cards include the Target RedCard and the Macy’s Star Rewards Card.
Some store credit cards can be used at an entire family of stores. That’s the case with the Gap Good Rewards card. You can use it at Gap, but you can also use it at sister stores Old Navy, Athleta, and Banana Republic.
How Do Store Credit Cards Work?
Store credit cards work a lot like regular credit cards. When you swipe at the checkout, you won’t owe any money in the moment. But that money will be due at the end of your statement cycle. If you pay off your balance in full, you won’t owe any interest. If you don’t, though, store credit cards do typically charge higher-than-normal APRs.
While the best financial move is to pay off your store credit cards in full every month, at the very least you will want to pay the minimum due each statement cycle. If you don’t, you risk a late payment reporting to the credit bureaus, which can have a negative impact on your credit score.
Negative marks on your credit report can make it harder to secure financing in the future. If you do manage to secure a loan or other debt product with negative items on your credit report, the interest rate you’re offered will likely be higher.
Store cards are typically unsecured, which means you don’t have to put up any collateral. But if you have poor credit, some stores will issue a secured store credit card. This means you have to put a deposit down, then you will “borrow” against your deposit. If you make regular, on-time payments, secured store credit cards can help you build and improve your credit.
Amazon is one retailer that does this. Its Prime Store Card is an unsecured credit card, while the Amazon Prime Secured Card requires a deposit of $100 to $1,000. You can graduate to an unsecured Prime Store Card after a year of on-time payments. At that point, you’ll get your deposit back.
Pros and Cons of Store Credit Cards
There are disadvantages and advantages to using store credit cards. We’ve gathered the most prominent to help you decide if using a store credit card makes sense for you.
- Lower minimum credit standards than traditional credit cards.
- Usually store cards don’t come with an annual fee.
- A few store cards offer consistent discounts.
- Some stores may offer promotional items or discounts upon opening a card.
- Can only use at one store or family of stores.
- Encourage more spending.
- Can cause negative line items on your credit report.
- Can negatively impact your credit utilization.
- Most cards that offer a discount offer that discount on one purchase – not every purchase.
Store credit cards usually come with lower minimum credit requirements than credit cards issued by large banks. That means that depending on the store, it may be easier to qualify with less-than-perfect credit or a higher debt-to-income ratio.
Another positive to store credit cards is that unlike many bank-issued credit cards, most store cards don’t come with an annual fee.
Some store credit cards offer regular discounts that are significant enough to take note. For example, as a Target RedCard holder, you get 5% off every purchase you make at Target. Target also does price matching, so if you find an item cheaper somewhere else, you can purchase it at Target plus get an extra 5% discount on top of the price match.
During the holiday season, many stores offer promos with store card signup. You might be offered 20% off your first store card purchase or a free thermos when you’re approved for your store credit card. While these offers can be viewed as a one-time positive, they often serve as bait that can get you ensnared in a credit trap if you’re not careful.
The most obvious con of store credit cards is that you can only use them at one, specific store — or in cases like Gap, you can only use them at one family of stores. But there are other potential negatives, too.
Store Credit Cards Encourage Spending at One Store
Store credit cards can encourage you to spend more with a certain brand or retailer than you would otherwise. That 5% off with every RedCard purchase? It’s a net positive if you’re using it for purchases you would’ve made anyways.
But if you find it’s feeding your Target addiction, it can end up being a net negative. If you’re spending $200 more per month with a retailer than you normally would, there’s no discount on Earth that’s going to help you make up the gap in your budget.
Because store credit cards can encourage irresponsible spending, they can also create nightmares for repayment and your credit report if they’re not used with caution.
High Interest and Potential Negative Line Items
If you can’t afford to repay in full, you’re likely to be charged sky-high interest rates. If you can’t even afford your minimum payment, your credit is going to suffer, making it more difficult to do things like secure a car note or obtain a mortgage in the future.
Application will Ding Your Credit Score
While store credit cards do tend to come with lower minimum credit requirements, that doesn’t mean there are zero standards. Every time you apply for a credit card or other lending product, your credit scores could take a slight hit. Usually, this is okay if you’re approved as the new line of credit gives you an opportunity to build your score by making regular, on-time payments.
But If you apply for a store credit card at checkout only to find out you don’t meet the credit requirements, you could walk away with a ding on your credit report with nothing to show for it.
Lower Credit Limits Lead to Higher Credit Utilization
Store credit cards also tend to have lower credit limits than regular credit cards. This can affect your credit utilization. An ideal credit utilization is somewhere around 30% or less.
Let’s say you have a regular credit card with a limit of $2,000. You spend $400, resulting in 20% credit utilization.
But if you have a store card with a limit of $500 and spend that same $400, your utilization rate is 80%, even though you spent the same amount of money.
What Are Hybrid Store Credit Cards?
Hybrid store credit cards can either be debit rewards cards that are linked to your debit account or credit cards issued in partnership with a traditional lending institution. Some stores offer multiple types of cards, including the hybrid credit card.
For example, Macy’s has two cards: Its store card is the Macy’s Star Rewards card, but it also has another option called the Macy’s American Express Card.
With the latter, you can use your card anywhere — not just at Macy’s. But when you redeem points earned on purchases, you’ll be able to convert them all into Star Money to spend at Macy’s only. While it’s nice that you can use the card anywhere, the rewards are still limited to that one retailer.
Let’s say you don’t want a credit card, but you do want the rewards. Some retailers, like Target, give you that option. Instead of a RedCard that functions like a credit card, you can opt for a RedCard debit card.
The debit card links directly to your preexisting checking account, so you won’t be borrowing any money or putting any negative marks on your credit report. But you’ll still get the 5% discount on all of your Target purchases.
You will still have to be careful about overspending, though. Just because it’s debit rather than credit doesn’t mean excessive spending won’t hurt your budget. It would just do so without interest.
Are Store Credit Cards Worth It?
If you’re already doing weekly shopping with a specific store and the card gives you a perpetual discount, then, yes, a store credit card could be worth it if you’re using it responsibly without increasing your spending.
But most store credit cards only offer an initial discount. The one-time discount or promotional offer opens you up to potential credit woes in the future that may not be worth the initial “savings.”
Alternatives to Store Credit Cards
Regular credit cards offer many of the same benefits of store cards with less limitations. Sometimes the benefits cast an even wider net.
Higher Credit Limits
While credit requirements for regular credit cards tend to be higher, they also tend to offer a higher credit limit, which can ultimately lower your credit utilization rate.
You do need to remember that those higher credit limits tend to come with slightly higher credit requirements. It’s completely possible to qualify for a bank-issued credit card with less-than-perfect credit, but it’s going to be harder.
Cashback Rewards Wherever You Shop
The Discover Cash Back Credit Card offers 5% cash back rewards on every purchase you make in rotating categories, like gas stations or restaurants. You don’t have to frequent a specific gas station or eatery – as long as it’s in the right category you’ll get the rewards.
While it’s not an upfront discount like the Target RedCard, the rewards you earn can be applied to your monthly statement, or you can deposit the money you earn into your bank account.
Regular credit cards can come with other perks, too. If you’re really into travel, your card might help you earn points with your favorite airline or hotel chain. Some cards offer under-the-hood perks like travel insurance or insurance on rental cars when you use the credit card to make your reservation.
Let’s take a look at a real-life travel credit card. The Capital One Venture Card gives you ‘miles’ on every purchase. You can redeem these miles on any airline or hotel purchase. If you make a travel purchase, you’ll currently earn 5x miles for every dollar you spend. Each point is currently valued around $0.02, so you’d be earning $0.10 with each dollar. That’s an incredible 10% back.
Under the hood, the Capital One Venture Card also gives you:
- An effective refund on up to $100 of Global Entry and TSA PreCheck application fees.
- Two visits to Capital One Lounges per year.
- Access to free medical, legal, and travel concierges while you’re away from home.
- Free 24/7 roadside service.
- Free rental car insurance.
- Lost luggage reimbursement.
And the list goes on.
Secured Cards Outside the Store Credit Card Ecosystem
If you don’t have great credit, you can get a secured card outside of the store card ecosystem, too. If you’re not a big Amazon shopper — or you just want to be able to use your secured card places other than Amazon – you could look at an option like the Capital One Quicksilver Secured Cash Rewards card.
This card can be used anywhere Mastercard is accepted. There’s no annual fee, and you even earn at least 1.5% cash back on most purchases. While you have to wait 12 months before you have the opportunity to convert your Amazon secured card to a full-fledged credit card, Capital One only makes you wait six months.
Conclusion about Store Credit Cards
Whichever credit card you choose to use — whether it’s a traditional card or one issued by a retailer – make sure you use it responsibly. Outside of payday loans and a few other predatory products, credit cards are one of the most expensive forms of debt you can take on in terms of APR.
While perks, discounts, and cashback are all nice, banks and stores offer these benefits for a reason. In the end, they’re profiting off of credit cards. Enough people either don’t use them responsibly, or come upon a hardship where they feel they have no other choice, that they end up paying the bank enough collective interest to make up for the costs of giving out free airline miles and 5% discounts.
Credit cards are a useful tool to build credit history or improve your score, but go in with your eyes wide open – especially if you’re applying for a store-issued card.
Pittsburgh-based writer Brynne Conroy is the founder of the Femme Frugality blog and the author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.