Best Store Credit Cards

If you are a frequent shopper at a chain store you are bound to be asked to sign up for a credit card. A store credit card allows you to purchase merchandise at their store or if they are a chain, at any one of the stores that are in their chain.  Large department stores, electron chain stores, and clothing store chains are some of the stores that are likely to try to tempt you with a store credit card.  The store will try to lure you in with amazing one time deals and possibly additional reward points, but unless you frequently visit a specific chain, the costs of owning a store credit card outweigh the benefits.

Discover the Best Reward Credit Cards

Who should get a Store Credit Card?

If you are looking to rebuild your credit or even initiate credit history, a store credit card can be a great entry point. Private label store credit cards do not allow you to use the card at different locations and usually do not require you to have good to great credit, to successfully apply. These are referred to as closed-loop credit cards. In fact, many stores have an agreement with financial institutions where they accept credit scores near the 550 range.  Co-branded credit cards, which are referred to as open loop credit cards, have agreements with networks such as Visa, MasterCard or American Express, generally, have higher standards for their credit and allow you to use the credit card at a location other than the store or the company’s website.

By using a store credit card, and keeping a low balance, you can reduce your utilization ratio which is the amount of credit used relative to the amount of credit that you have available.  Your utilization ratio is approximately one-third of your credit score, which can make using a store credit card a good choice for someone who needs to repair their credit history.

If you also generally purchase most of your items at one time the incentives that store credit cards provide can be substantial.  For example, college students who purchase most of their clothes for the year before the semester starts can save a tidy sum, with robust incentives.  If you purchase $1,000 of clothes and receive a 40% discount, the $400 you save can be used to pay down your balance prior to a financing charge kicking in.

Pros and Cons of Using a Store Credit Card

Pros

  • The most significant benefit is a signup discount and bonus. Generally, when you apply for a card and receive approval you receive a substantial discount on the items that you are purchasing on that day. Additionally, the discount you receive when you sign up can work in tandem with other discounts. This means depending on the size of your purchase you can receive a substantial discount by signing up on the spot.
  • Store credit cards also come with regular discounts. The store is keen to get you in the door and there is no better incentive then regular discounts.  Sometimes these discounts are in addition to a regular sale, which is offered to all customers, which can allow you to receive a substantial discount.  Stores also offer friends and family sales where you are allowed to bring family members or friends who can receive the same discount you receive with your credit card.  If there is a limit on the number of items you are allowed to purchase on your own, this can be a great deal.  For example, if there is a 40% sale on bed sheets, but you can only buy one set, per person, friends and family sale might allow you to buy an additional set.
  • Similar to other credit cards, it provides you the ability to purchase an item and pay for it when you have the money. If you live paycheck to paycheck, a store credit card will allow you to put off your cash payment until later in the month.

Cons

  • Limited Use – The biggest issue for customers that use store credit cards is their limited use. If a store credit card is a co-branded credit card then it can be used in any location. For example, a Macy’s credit card can only be used in Macy’s department store. A co-branded store card such as the Costco American express can be used at Costco or any location where American Express is accepted. Besides this difference co-branded credit cards are a lot harder to apply for and have greater credit requirements for their applicants.
  • Higher Rates – Store credit card generally have higher finance charges on balances then standard credit cards. The higher rates are a reflection of the lower credit standards which means that the credit card issuer is taking a greater risk that a customer will default on their payments.  Retail store credit cards have a national average of 24.99% which compares to the average rate for a standard credit card that is 16%. If you carry a balance higher interest rates means that you will pay more in interest.  The 9% average difference comes out to be $9 for every $100 on your balance per year.
  • Reward Limitations – While your store credit card will likely provide a great discount when you initially sign up for it, the rewards will also likely have limited redemption options subsequently. Most store credit cards only provide you with rewards that entail discounts or purchases at the store or chain. Once you accumulate enough points, you will generally receive a gift are or an additional discount if you use your store credit card on store purchases.  This is contrary to a co-branded card where you can use rewards for cash back or travel or event merchandise.
  • Store credit cards do not have perks such as zero interest. Instead, they might provide promotions such as deferred interest, where you do not pay interest for a specific period such as 6-months or a year.  To take advantage of deferred interest you need to pay off the entire balance before the promotional period comes to an end to avoid a finance charge.  If you don’t you will get hit with back-dated interest charges on the entire balance, so be careful. This compares to a true zero interest credit card program where you will only be charged interest on the balance that remains after the promotional period ends.
  • Limited Credit Limits – Store credit cards generally have low credit limits to start. Receiving a credit line of $500 is not uncommon for a store credit card.  This is easy to max out in a single day, especially if you plan on using the robust discounts available as a signup bonus. Store credit cards usually do not automatically approve higher limits which can be the case with a standard credit card.
  • Credit experts claim that a standard credit card looks better on your credit record compared to a store credit card. This is because store credit cards have lower standards and make qualifying easing. Credit officers understand that store credit cards are used by many to rebuild their credit history or first-time credit card applications. To push your credit score higher into the good or great category you will eventually need a major credit card even a co-branded store card.

Monitoring your Credit Score

A store credit card is a great way to rebuild or start your credit history.  Once you start using your credit card and paying off your balance, it’s important to monitor your credit history with the goal of eventually getting a major credit card.

There are several ways to monitor your credit history.  You are entitled to a 1-free credit report, every year, from each of the major credit bureau, which includes Equifax, Experian, and the TransUnion.  There are a few free aggregators where you can request a free credit report.

Your credit report summarizes your borrowing and payment history.  The information you will see includes your new accounts, open accounts, closed accounts, as well as, any unpaid bills, and late bills. Any credit card line, loan (including auto loans or mortgages) will show up on your credit report. This provides the basis for your credit score.

Your credit score is called your FICO score, and it’s a number between 300 and 850, that is calculated by a formula that determines your credit history. The 3-main credit bureaus use a formula that they lease from FICO. Each agency crafts a formula that is slightly different which indicates your reliability as a borrower.

What is evaluated to generate a credit score?

The credit agencies will look to see if you pay your bills on time.  If you have reported late bills, this will negatively affect your score.  Setting up an automatic payment is a great way to avoid a late bill.  Additionally, if you use email, receiving notifications online is also helpful.  Receiving your bill in the mail can have its pitfalls. If the bill gets lost or you accidentally throw it out, you could forget to pay your bill on time. Most store credit cards have a grace period, which is a few days after the bill is due.

If you max out on your credit card your utilization will be high and the credit agency will deem that a negative.  The agencies will also look at the number of years on an account. The longer your history the better an agency will be able to determine your ability to repay your bills. Unfortunately, the formula’s used negatively affect younger borrowers who do not have a substantial credit history.

The agencies also look at any new credit accounts you have recently opened and how many lenders have inquired about your credit.  Higher levels of activity are negative toward your score.  They also look at the range of credit you hold, such as mortgages, car loans, student loans and credit cards.


Learn More about Credit Cards


Conclusion

A store credit card allows you to purchase merchandise at a specific store or a store chain. There are generally two types of store credit cards, open loop, and closed loop credit cards.  Close loop credit cards have limitations and only allow you to purchase items at their store.  Open loop credit cards which are also called co-branded credit cards, have greater flexibility and allow you to purchase items and services at any location that the network is accepted.

Store credit cards are good for people that have fair to poor credit scores and are looking to rebuild their credit.  Generally, store credit standards are more lenient then general credit card standards. Store credit cards are also good for those who have no credit history. Usually, the credit line is small relative to the line you might receive on a major credit card. In fact, many stores have an agreement with financial institutions where they accept credit scores near the 550 range.  This compares to co-branded credit cards, which have agreements with networks such as Visa, MasterCard or American Express, and generally have higher standards for their credit lines.

To attract customers, a store will try to lure you in with amazing one time deals and possibly additional reward points, but unless you frequently visit a specific chain, the costs of owning a store credit card outweigh the benefits.

If you are looking to rebuild your credit or even initiate credit history, a store credit card can be a great entry point. You should be leery of the high average APR’s associated with store credit cards. The national average for a store credit card is nearly 25% which is approximately 9% higher than the average national rate for a general credit card which is slightly higher than 16%.