What Is a Store Credit Card? Brief Overview of Benefits & Risks

Are you looking for ways to save money while shopping?

If so, you may have been offered a store credit card at a checkout counter. Store credit cards have grown in popularity in recent years. They offer exclusive discounts, reward programs, and special financing offers, among other benefits.

However, these cards also come with risks, such as high-interest rates and the temptation to overspend. In this article, we’ll take a closer look at what store credit cards are, their benefits and risks, and tips for using them responsibly.

Understanding Store Credit Cards

Definition of a Store Credit Card

A store credit card is a credit card that is specific to a retailer or a retail chain. It can be used only at that store or group of stores. Store credit cards are often marketed to consumers as a way to get discounts and other perks for shopping at that store. In essence, they are a loyalty program that entices consumers to shop more frequently at a particular store.

Note that in recent years, the above definition’s lines have been blurred and many retailers now offer a credit card that functions as a regular credit card, that can be used anywhere that credit card’s network (like Visa or Mastercard) is accepted, but also earn the user rewards at the issuing retailer’s store. An example of this is the TJ Maxx Credit Card / Marshalls Credit Card (the Platinum MasterCard version), see open-loop description below. 

Store credit cards can be a great option for frequent shoppers who want to save money on their purchases. They offer a variety of benefits, including exclusive discounts, reward points, and sign-up bonuses. However, it’s important to also be aware of the potential downsides of store credit cards, such as high-interest rates and fees.

How Store Credit Cards Work

When you apply for a store credit card, the retailer running the program will usually check your credit report and score. If you are approved, you’ll receive a line of credit that can be used to make purchases at that store or its affiliates. Typically, you will be required to pay off the balance in full each month or make minimum payments with interest, just like a regular credit card. Retailers work with banks like Synchrony and Comenity in the background, who are the real entities issuing and managing the credit card. 

One of the main benefits of store credit cards is that they often offer incentives for using them. For example, some store credit cards offer cash back or reward points for every purchase made with the card. Others offer exclusive discounts or coupons that can be used to save money on future purchases.

Types of Store Credit Cards

There are two main types of store credit cards: closed-loop and open-loop. Closed-loop store credit cards can only be used for purchases at the retailer that issued them. Open-loop store credit cards can be used anywhere that the card issuer’s brand is accepted.

Closed-loop store credit cards are popular among retailers because they help to build customer loyalty. By offering exclusive discounts and other perks, retailers can encourage customers to shop more frequently at their stores. Examples of closed-loop store credit cards include Macy’s, Victoria’s Secret, and Best Buy.

Open-loop store credit cards, on the other hand, are more versatile. They can be used at a variety of different retailers, which makes them a good option for consumers who want a credit card that can be used for multiple purposes. Examples of open-loop store credit cards include the Amazon Prime Rewards Visa Signature card and the Target REDcard.

Overall, store credit cards can be a great way to save money on your purchases and earn rewards for your loyalty. However, it’s important to be aware of the potential downsides of these cards, such as high-interest rates and fees. If you’re considering getting a store credit card, be sure to read the terms and conditions carefully and compare the benefits and drawbacks of different cards before making a decision. Some store credit cards also make their rewards difficult to redeem and/or make the expire if not used quite quickly, that’s a common “trick” to watch out for. 

Risks of Store Credit Cards

While these cards can be tempting, it’s important to consider the risks associated with them before applying.

High Interest Rates

One of the biggest risks of store credit cards is their VERY high-interest rates. In many cases, these interest rates can be significantly higher than traditional credit cards, which means that if you don’t pay off your balance in full each month, you could end up paying a lot in interest charges. This can make it difficult to get ahead financially and can even lead to debt if you’re not careful.

In our experience, most store credit cards’ interest rates tend to hover around 30% (per year)!! As far as we know, this is the most expensive type of loan or debt. It can quickly make your purchases much, much more expensive. 

It’s important to carefully review the terms and conditions of any store credit card you’re considering before applying. Make sure you understand the interest rate and any other fees associated with the card, as well as the rewards and benefits you’ll receive.

Limited Usability

Another risk of store credit cards is their limited usability. Unlike traditional credit cards, which can be used at a wide range of retailers and merchants, store credit cards can only be used at the specific retailer or group of retailers that issued the card. This can be inconvenient if you need to make a purchase elsewhere and don’t have another credit card that’s widely accepted.

Before applying for a store credit card, consider whether you’ll be able to use it frequently enough to make it worth your while. If you only shop at the retailer occasionally, or if you prefer to shop at other retailers, a store credit card may not be the best choice for you.

Impact on Credit Score

As with any credit card, having a store credit card can affect your credit score. If you apply for multiple store credit cards or make late payments, this can negatively impact your credit score. On the other hand, if you use your store credit card responsibly and pay off your balance in full each month, it can help you build a good credit history.

It’s important to be mindful of your credit score and to take steps to protect it. This may include limiting the number of credit cards you have, making payments on time, and monitoring your credit report regularly.

Temptation to Overspend

Finally, one of the biggest risks of store credit cards is the temptation to overspend. Store credit cards can be tempting to use, especially if you’re offered a discount at the checkout counter. However, it’s important to remember that the rewards and discounts may not always be worth it if you end up overspending or carrying a balance month to month.

To avoid overspending, it’s important to set a budget and stick to it. Only use your store credit card for purchases that you would have made anyway, and avoid making impulse purchases just because you have the card.

Tips for Using Store Credit Cards Responsibly

Store credit cards can be a great way to save money and earn rewards while shopping, but it’s important to use them responsibly. Here are some tips to help you make the most of your store credit cards:

Pay Off Balances in Full Each Month

One of the most important things you can do to use your store credit cards responsibly is to pay off your balance in full each month. By doing so, you can avoid accruing interest charges and keep your credit score healthy.

Not only will paying off your balance in full each month save you money on interest charges, but it can also help you maintain a good credit score. Late payments and high balances can negatively impact your credit score, so it’s important to stay on top of your payments and keep your balances low.

Be Mindful of Credit Utilization

Credit utilization is the percentage of your available credit that you’re using, and it’s an important factor in determining your credit score. To maintain a good credit score, it’s recommended that you keep your credit utilization under 30%.

When it comes to store credit cards, it can be tempting to use them to their full extent to take advantage of discounts and rewards. However, it’s important to be mindful of your credit utilization and avoid using your store credit cards excessively.

Additionally, many store credit cards have low credit line limits. In our experience, they can start as low as just a couple of hundred dollars. If you don’t have many other credit cards, then spend most of your credit line, you can easily have a very high credit utilization ratio. 

Avoid Applying for Multiple Cards at Once

While it can be tempting to apply for every store credit card that comes your way, doing so can negatively impact your credit score. Each time you apply for a credit card, it results in a hard inquiry on your credit report, which can lower your score.

Instead, only apply for store credit cards that you know you’ll use frequently and can use responsibly. Before applying, make sure you understand the terms and conditions of the card, including the interest rates and fees.

Keep Track of Promotional Offers and Deadlines

Many store credit cards offer special financing offers or reward programs that can help you save money while shopping. However, it’s important to keep track of the deadlines and pay off your balance before the promotional period ends.

If you don’t pay off your balance before the promotional period ends, you could be hit with high-interest charges or lose out on rewards. To avoid this, make sure you understand the terms and conditions of any promotional offers and set reminders for yourself to pay off your balance on time.

This is especially important to watch out for on special financing (like 0% interest for a period of time such as 6, 12, or 24 months), where if you don’t fully payoff the purchase by the end of the period, you will be charged interest from the purchase date.