When to open a store credit card

A family looks at clothes at a store.Image: A family looks at clothes at a store.

In a Nutshell

Retailers sometimes offer a discount when you open their store credit card, but you should do the math to figure out if it's worth it.
Louis DeNicola is a personal finance writer and has written for American Express and Discover. Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

Whether you’re holiday gift shopping or looking for something nice for yourself, the discount that comes with a new store credit card can be enticing.

You may be able to get 10% or 20% off, sometimes even more, or perhaps get a financing offer on your large purchases.

The savings are real, but it’s important to consider more than the one-time discount you’ll receive. Weigh these pros and cons before applying for a store credit card — you may be better off looking for a coupon elsewhere and paying with a general rewards credit card, debit card or cash.

Pros of store cards

While store credit cards aren’t a good fit for every circumstance, there are times when applying for and using a new store card could be worthwhile.

1. Discounts and special offers

Depending on what you’re purchasing, you may be able to save a lot of money with the initial discount many stores offer when you sign up for their store card. You also might be eligible for ongoing discounts and offers as a cardholder.

2. Easier access to credit

It may be easier to get approved for a retail credit card than a non-retail credit card. If you need to make a purchase but can’t afford to pay the full amount for it today, using a credit card is one option. And if your credit isn’t good enough to qualify for a different lower-interest card, or you calculate that a discount is worth more than a higher interest rate, a retail card may be an option. But as with any credit card balance, make a plan to quickly pay off the debt so that you’re not carrying a balance.

3. They can help build credit

You may be able to use a retail card to build credit. Check to see if the card issuer reports your account activity to the three major credit bureaus. To build credit with a card, you should make on-time payments. You’ll only build credit with the information that is reported to the credit bureaus.

“If you haven’t established credit yet, (retail cards) may be a great opportunity for you to start building credit,” said Whitney Lee, client service advisor at JOYN Advisors, Atlanta. “The problem is that they have considerably high interest rates, so don’t allow yourself to carry a balance.”

To help build credit responsibly, try to use less than 30% of the card’s credit limit, and try to pay the balance in full and on time each month.

Cons of store cards

Store credit cards can be very similar to non-store credit cards, but there are important differences to consider.

1. Higher interest rates

Store cards tend to have higher interest rates than nonstore credit cards, which could offset any potential discounts or rewards if you hold a balance.

In 2016, the average interest rate on the largest retail cards was a little below 24%, while as of August 2017, the average rate on all credit cards was about 16%, according to surveys from CreditCards.com.

2. Less versatility

Some stores offer co-branded credit cards with a credit card network such as Visa or Mastercard that can be used anywhere the associated network is accepted. However, many store cards only work at the associated store. This is known as a “closed-loop card.”

3. Limited rewards

Store cards often offer special perks and bonus points when you make purchases, but you may have to use your rewards at that particular store.

A standard rewards credit card is often more versatile, and some may offer an equivalent or even better rewards rate on your purchases. If you’re looking for a financing offer, you also might be better off with a general 0% introductory APR credit card.

4. Lower credit limits

Retail credit cards tend to have lower credit limits than general credit cards. As a result, it can be more difficult to keep your utilization rate down if you want to use the card to make purchases.

Your credit utilization rate — the percentage of your total credit limit and per-card limit that you use — may be a factor in calculating your credit scores. Generally, a lower utilization rate is better for your credit.

If you spend $500 on a card during the month and your credit limit $1,000, your utilization rate for that card is 50%. But if you spend the same amount and your credit limit is $3,000, your utilization rate for that card drops to a little less than 17%.

Most experts recommend that you keep your utilization rate on individual cards and across all your cards below 30%.

Is the discount worth it?

First, let’s compare the cost of paying off a $500 purchase with minimum monthly payments of $25 with a standard credit card with the average interest rate of 16%, versus a store card with the average interest rate of 24%:

  • For the standard credit card with a 16% interest rate, it’d take 24 months and cost about $85 in interest to pay off the balance.
  • For the store card with a 24% interest rate, it’d take about 26 months and cost about $145 in interest to pay off the balance.

Now let’s look at how that compares to the savings you could get with a hypothetical 15% discount from the store card on the $500 purchase, while making only minimum payments.

A 15% discount on the initial purchase gets you savings of $75. That means you’re paying a total purchase amount of $425. With the 24% interest rate and monthly payments of $25, it’d take 21 months and cost about $100 in interest to pay off the balance.

Without the discount, using the store card in this example to make a purchase and pay it off over time would cost you more in interest payments. But when you add the 15% discount to the mix, you’d ultimately save $60 on the total purchase amount plus interest and pay it off three months faster if you used the store card instead of the standard card. Just make sure you can make the payments in the expected timeframe so you don’t pay even more in interest.

When you’re deciding whether or not a store card is worth it, it’s important to run the numbers. Online calculators can help you figure out the potential interest payments.

You may also be able to save money without a store card by looking for discount codes and coupons before shopping and signing up for retailers’ email lists. Sometimes these deals and coupons can be even more valuable than the offers that come with opening a store card.

Bottom line

Store credit cards may offer an enticing introductory discount and ongoing rewards, but there may be more cons than pros, depending on your reason for applying.

Consider shopping with a general use reward cards that offers versatility when redeeming rewards, may have lower interest rates and allows you to earn points or cash back for purchases at any store. If you’re unable to get a rewards card, a retail card may be a good way to start building credit, but always try to follow the guidelines for building credit responsibly.

About the author: Louis DeNicola is a personal finance writer and has written for American Express, Discover and Nova Credit. In addition to being a contributing writer at Credit Karma, you can find his work on Business Insider, Cheapi… Read more.