Why store credit cards are (almost) always a bad idea

Nov 22, 2019

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“Would you be interested in saving 20% on this purchase by applying for our store credit card?”

(Photo by Maremagnum/Getty Images)
(Photo by Maremagnum/Getty Images)

If you’ve ever done much in-store holiday shopping, you’ve likely heard that offer many times. Retailers often have workers pitch credit card sign-ups at checkout, using discount welcome offers as a ploy to reel you in. I’ll admit, I’ve been tempted to take advantage of an offer when I’m making purchases at my favorite department store. While additional discount (especially on a large purchase) can be appealing, however, store cards rarely provide you long-term value. Here’s why.

They offer limited rewards

Most retail credit cards only offer significant rewards on store purchases, which doesn’t provide a lot of value unless you are spending thousands of dollars at a particular store each year. For example, a GAP credit card will rewards 5x points only on Gap Inc. brands (Gap, Old Navy, Banana Republic and Athleta). Those can be redeemed for a $5 reward at 500-point increments. If you’re spending $100 a month on average on these brands, that equates to only $60 in rewards at the end of the year., and that $60 can only be used for store purchases. While you may not get 5x with a standard rewards credit card on the same purchases, the rewards you do earn can be used on a number of valuable redemption options.

These cards also typically offer abysmal benefits. If you spend over a certain threshold on some cards, you may qualify for store status with more savings opportunities. But you won’t be getting many other ancillary benefits that travel credit cards offer. You may not be rewarded for spending elsewhere, and your points may only be good at that specific retailer.

(Photo by @alesha_macarosha via Twenty20)
Consider whether or not you could get a better rewards rate with a different card. While you may be earning 5x on purchases, pay attention to the redemption rate and redemption options. (Photo by @alesha_macarosha via Twenty20)

Store cards typically come with higher APRs 

At TPG, we always advocate paying off your credit card bills in full each month. Letting a balance ride on your card isn’t beneficial no matter what type of card you have. Unfortunately, things happen and debt accumulates. In fact, the average American has a credit card balance of $6,194.

A recent survey conducted by CreditCards.com revealed an average APR of 26.01% for all retail store cards. The average APR of all credit cards comes in at a much lower 21.10%. If you do carry a balance, the higher APRs on store credit cards could end up costing you hundreds of extra dollars in interest payments.

For example, let’s say you have an average balance of $6,194 on a standard, non-store credit card. With a 21.10% APR, you’ll need to pay $557 per month for a year to pay off the amount. Your total interest charges will be about $731. Now, let’s say that debt is on an average store credit card. If you make payments each month to get debt-free in one year, your interest charges will clock in at about $907. With a store card and the same amount of debt, you’ll be stuck paying an additional $176 in interest. Translation: The store gets the rewards, not you.

Long-term value is typically mediocre

Store credit card welcome offers are built on answering a simple question: Would you like to save some cash today? Of course, the answer is yes. Everyone wants to save some extra bucks. If the purchase is big enough, that one-time bonus discount can deliver a sizable benefit. However, it’s important to note that many of those appealing bonuses are capped. For example, if you open a Macy’s Credit Card, you can save 20% that day and the next, but the savings can not exceed $100. If you’re planning to purchase $500 worth of clothes and goods from Macy’s, this might make sense. You’ll be able to knock off a sizable chunk of your final bill. If you’re spending more (or less), it might not be worth the effort.

While that $100 is certainly a nice perk, it’s important to comb through a range of other details that will matter after the one-time discount. Outside of understanding your APR, transaction fees and other essentials, you must think about the everyday benefits of using the card — not just the day you open the account. How often do you shop at the store? If you’re constantly at Macy’s, that credit card can pay off with 10% rewards points on most purchases. However, if you’re only buying a few pairs of jeans or a few outfits every year, that card isn’t worth it long-term. There are other cards you can use to earn rewards on your department store purchases while also enjoying other benefits.

Store cards count towards Chase’s 5/24 rule

If you are hoping to apply for Chase cards down the road, it’s important to strategize your credit card applications. Chase has an unofficial 5/24 rule where you can’t be approved for a Chase card if you’ve opened five or more personal credit card accounts across banks within the past 24 months. While some business cards are excluded from your 5/24 count, pretty much every other credit card account you open will add to your 5/24 score — including store cards. I wouldn’t suggest jeopardizing future approvals for high-value Chase cards (including Chase’s business and cobranded card options) for a low-value store card.

(Photo by Isabelle Raphael / The Points Guy)
Store cards count towards Chase’s 5/24 rule, which is just another reason why they may not be worth it. (Photo by Isabelle Raphael/The Points Guy)

There is a valid argument for not letting 5/24 dictate your entire credit card strategy, but it’s something to keep in mind before applying for a store card. You don’t want to eliminate the opportunity to take advantage of offers on cards like the Chase Sapphire Preferred Card or Chase Freedom Unlimited by falling for a 20% one-time discount and a card you’ll only use a few times a year.

The information for the Chase Freedom Unlimited has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.

Is a store credit card ever worth it?

While you’re almost always better off with a rewards credit card, there are a few scenarios when having a particular store card makes sense.

For one, store cards are generally easier to be approved for. When used appropriately, you can build your credit with a store card before moving on to higher-value cash-back or travel cards. Similarly, store cards can be used to boost your credit utilization ratio and repair a low credit score. The key in these situations is to not carry a balance on that card each month. If you want to use your store card, pay off what you charge in full each month. That way you won’t have to worry about the high interest rates.

There are also cases where the benefits of a store card are worth it when you shop there frequently and don’t earn high rewards with other cards. For example, if you are spending thousands of dollars at Target throughout the year on groceries, clothes, makeup, decor and other assorted purchases (because we all know Target has just about everything you could ever need), a Target REDcard might be worth it for you. You’ll save 5% on all Target purchases in-store and online, including clearance items, store Starbucks, specialty gift cards, same-day delivery and more. The card offers free two-day shipping, exclusive discounts and additional time for returns and exchanges. You’ll also get 10% off on your card anniversary.

Throughout the course of a year, you could easily save hundreds of dollars with the Target REDcard depending on how much you shop. Plus, Target is frequently excluded from bonus categories like supermarkets and grocery stores on other cards, meaning you don’t have to worry about an opportunity cost by not using a different card.

Image courtesy of Target
If you’re spending a lot of money at a retailer that may not earn rewards with other cards (such as Target), getting the associated store card could prove valuable. (Image courtesy of Target)

Amazon, Costco and Walmart are other large retailers where you’ll likely get the best rewards by using the store card. In fact, all three offer open-loop cards (meaning you can use them on more than just store purchases) that earn rewards on categories other than just branded purchases. For customers who spend a solid chunk of change at these stores, it may very well be worth it to add the associated store credit card to your wallet. The important thing is to pick cards that add long-term value to your credit card strategy rather than letting a one-time discount at the register make your application decision for you.

Bottom Line

It can be tempting to take advantage of high discount offers in exchange for a credit card application, but it’s rare that retail credit cards provide any real value to your wallet. Most of the time, you’ll be better off strategically using rewards credit cards that earn cash back or transferrable points currencies. High APRs, low long-term value, mediocre benefits and the fact that they’ll take up a Chase 5/24 slot are all reasons to be cautious when considering a store card. However, that doesn’t mean that they are never a good idea. There are situations where your spending habits could make a specific store card worth it. It’s all about making sure you’ll be able to use it to maximize purchases alongside the rest of your credit card lineup.

Additional reporting by Dan Rafter and David McMillin. 

Featured photo by Prathan Chorruangsak/EyeEm/Getty Images.

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