It's hard to shop at any retailer these days without being asked if you want to sign up for their store credit card. Even shopping online doesn't spare you from credit card offers. While it might be tempting to sign up for a store credit card and save up to 20% on that day's purchase, store credit cards often aren’t worth it compared to regular credit cards that are branded solely with a major processing network.
Unless they’re co-branded, store credit cards can only be used in a specific store or family of stores. For instance, an American Eagle store credit card can only be used on purchases made at American Eagle. Similarly, a Target REDcard can only be used in Target stores. The exception is when a store credit card is co-branded with a Visa, MasterCard, or American Express logo. Many stores also offer a co-branded credit card in addition to their store credit card.
Co-branded cards are branded with a specific merchant but also carry a network brand, like Visa or Mastercard.
By comparison, general-purpose credit cards, even co-branded store credit cards, can be used at any merchant that accepts credit cards from that processing network. They're just like any other credit card, but purchases made in the affiliated store will typically earn higher rewards or other benefits. You typically won’t run into any problems using a Visa or MasterCard as these credit cards are accepted in more places.
Higher Interest Rates
Store credit cards often have higher interest rates than regular credit cards. Store credit cards currently have an average 24.15% APR while the average of all credit cards stands at 20.09% APR as of July 31, 2020, according to The Balance's weekly credit card interest rate survey.
The higher interest rate means you’ll pay more interest when you carry a balance and it will take you longer to pay off your balance than if you had a credit card with a lower interest rate. Co-branded store credit cards tend to have slightly lower interest rates than those that aren’t cobranded, but even these rates are higher than for credit cards without a retail store affiliation.
Restrictions on Rewards
With store credit cards, rewards are relatively difficult to earn and have limited options for redemption. Earned rewards are limited to purchases you make in that store. Once you finally accumulate enough rewards for redemption (usually a gift certificate or coupon), you can only use it in-store. You may even be required to use your credit card to redeem the reward.
Cobranded store credit cards give you the opportunity to earn rewards on all of your collective purchases while earning higher rewards for purchases made in that specific store. Still, your options for redeeming may be limited to a coupon or discount that you can use in that store.
Non-store affiliated rewards credit cards are often more attractive with rewards in the form of a check or statement credit, points to use toward merchandise or a variety of gift certifications, or miles to offset travel expenses.
0% Interest vs. Deferred Interest
Store credit cards don’t offer APR perks like a 0% interest-free period. What you might find instead, particularly in stores that sell big-ticket items, is a deferred interest promotion. With deferred interest, you must pay the balance before the promotion period ends to avoid being charged interest. Otherwise, if any of the balance remains, you’ll get hit with backdated interest for the entire promotional period. With a true 0% interest rate promotion, you’ll only be charged interest on the balance that remains after the promotion period ends.
Store credit cards usually have low credit limits, at least to start with. It’s not uncommon for cardholders to be approved for a $300 or $500 initial credit limit on a store credit card. A credit limit that low is easy to max out in a single day, especially if you've received a credit card from your favorite store.
Impact to Your Credit History
Regular credit cards are better for your credit. Store credit cards are relatively easy to qualify, making them a good option for first-time credit card users or people looking to rebuild their credit. However, store credit cards only go so far as to establish a good credit history. To reach a good credit score, you’ll eventually need to get a major credit card, even if it’s a co-branded version of a store credit card.
Store credit cards may be good for getting started with credit. Once you’ve established a good credit history, a general-purpose credit card or a co-branded store credit card will be a better option.