Are Store Credit Cards a Good Option?

How Do Store Credit Cards Work?

Store credit cards, also called retail credit cards, come in two varieties: closed-loop and open-loop.

With a closed-loop card, you'll only be able to use the card for purchases at that store or, in some cases, at various stores owned by the same company.

Open-loop cards have a payment network logo on them, such as the Visa or Mastercard symbol. You can use these cards at any merchant that accepts cards that are part of the network.

In either case, the credit cards work the same way as general purpose credit cards when it comes to making purchases and paying the bill. You have a statement period, during which time your purchase amounts get added to your account's balance. Then, at the end of your statement period, you may have about three weeks before your bill is due.

If you pay less than the full amount on the bill, your remaining balance will carry over to the next statement period and begin to accrue interest. When you pay the bill in full each month, you generally won't have to pay any interest on your purchases.

Do Store Credit Cards Build Credit?

Any credit card can help you build credit if the card issuer reports your account to the major credit bureaus (Experian, TransUnion and Equifax), and many card issuers do. Remember, the store isn't issuing the credit card; it's partnering with a large bank or credit card network.

For example, TD Bank issues the Target REDcard™ Credit Card and Chase issues the Amazon Prime Rewards Visa card. These are all open-loop cards that you can use anywhere, but they offer extra benefits at Costco, Target and Amazon (and Amazon-owned Whole Foods), respectively.

Banks are also behind closed-loop cards. You may not be as familiar with Synchrony Bank or Comenity Bank, but they're large banks that issue many closed-loop store cards. They also generally report your account to the credit bureaus, so a closed-loop card could also help you build credit.

If you want to use your credit card to build credit, make at least the minimum payment on time every month to avoid late payments, and pay the balance in full when you can to avoid interest. Also, avoid using a large portion of your available credit limit (or pay down the balance before the end of your statement period) to keep your utilization ratio low.

Just like any credit card, your store card could wind up hurting your credit if you miss payments or max it out.

What Are the Advantages of Store Credit Cards?

If you frequently shop at the same retailer throughout the year, there are several reasons you may want to consider the store's credit card:

• Ongoing discounts: Store cards may offer an initial discount on your purchase when you sign up for the card as well as ongoing discounts and coupons at the store.
• Rewards program: Many stores have a rewards program, and you can often earn extra rewards when using the co-branded store card to make purchases. With open-loop cards, non-store purchases can earn you rewards you can redeem at the store.
• Cardholder benefits: Cardholders may receive additional benefits, such as free expedited shipping, extra time to return items, access to exclusive products and financing offers.
• Potentially easier qualification: It can be easier to qualify for a store card than a general purpose rewards credit card, which could make it a good option if you're new to credit or working to rebuild your credit.

Sometimes these benefits make a store card the best option. But there are also drawbacks to consider before applying.

What Are the Drawbacks of Store Credit Cards?

Opening a new store card isn't necessarily the best idea, particularly if you can qualify for a general purpose rewards cards. Here are a few things you'll want to watch out for:

• High interest rates: Store cards may have a high interest rate, which makes revolving a balance more expensive. If you're not able to pay your bill in full each month, a low rate card could make more sense, and you may want to rethink your budget.
• Low rewards rates: A store card's rewards program might be less valuable than a credit card's rewards program. In addition, the intro bonuses are often much lower with a store card. Getting a deep discount on your purchase might be nice, but some traditional rewards cards offer intro bonuses worth over $500.
• Limited options: You'll generally be stuck redeeming your rewards at the store that gave you the card, and may feel pressure to continue shopping there to benefit from having the card. This repeat business and loyalty is one of the reasons stores offer co-branded credit cards in the first place. You should comparison shop and buy products at a different retailer if it will lead to more savings.
• Deferred-interest promotions: A 0% annual percentage rate (APR) offer can be a great way to save money while you pay off a large purchase over time. With a general purpose credit card, the remaining balance at the end of the promotional period will start to accrue interest at the standard APR. But beware, some store cards offer deferred interest promotions that aren't the same as the 0% APR offers you may be used to. If you have a balance at the end of a deferred interest period, you'll have to pay all the interest that would have accrued during the promotional period.

Should You Get a Store Card?

Store and non-store cards both can help you build credit, pay for purchases over time and earn rewards. Determining which is best will depend on which cards you're comparing and how you plan to use the card.

If one of your favorite stores offers a credit card with rewards and exclusive cardholder benefits, it could be the best option. However, a general purpose card may offer higher rewards on all purchases, won't lock you into a particular store's program and could come with better financing promotions.