Store credit cards may seem like a minor issue in the big world of credit cards and debt, but unfortunately, these ubiquitous cards are often the cause of major credit trouble.

Thanks to exorbitant interest rates and an easy application process, store credit cards can significantly damage unwary consumers’ credit scores. Nevertheless, it is possible to avoid high charges and lengthy repayments.

Here’s what to watch out for when using this often-overlooked form of credit. 

Key Takeaways

  • Store credit cards can only be used in the issuer's store or groups of stores.
  • Many national retailers like Target, Walmart, and Costco offer store credit cards.
  • Many store credit cards have extremely high-interest rates.
  • You can build your credit history using a store credit card.
  • Store cards often offer discounts and other perks to cardholders.

What Is a Store Card?

A store card is simply a credit card that can only be used in a specific store or group. Do not confuse store cards with loyalty cards, which allow you to collect points when you spend in a particular store.

Unlike loyalty cards, store cards allow you to borrow money. If you are not careful, store cards can mean only one thing: high-interest debt. After all, stores are set up to make products appealing to persuade shoppers to buy more

Advantages and Disadvantages of Store Credit Cards

Store cards are incredibly easy to obtain, and they offer customers deals and discounts. Store credit cards can be handy for customers who use them regularly and who can pay back what they owe every month.

However, there are disadvantages to owning a store credit card. Many people with store credit cards end up paying high rates of interest on the purchases they have made. What's more, most big box store cards on the market charge over 25% interest, and some charge nearly 30%. These figures reflect high APR amounts, much more than a standard credit card.

Another issue is the illusion of "free money" with a credit card versus cash. “While the interest rates are unnecessarily high, the real problem is the accessibility of store cards. You can sign up for a store card at the checkout and start spending there and then," says James Daley, managing director of Fairer Finance.

Pros
  • Reports to credit bureaus

  • Easier to get than full service credit cards

  • Discounts, loyalty points and early sale access for cardmembers

  • A store card can help you build your credit

Cons
  • Very high interest rates

  • Limited credit lines

  • Store cards make it easy to buy more things than you may need

  • You can only use it in one shop or group of shops

Getting in Over Your Head

A big problem with these cards is that retailers don’t always check your credit rating before issuing your card. Although this sounds great in theory, they’re allowing those who don’t have the available funds to get into debt they cannot afford—without spelling out the consequences.

When you apply for a store card, a search is added to your credit file. If you apply for too many of them in a short time, your credit score will drop significantly, making it harder for you to get future credit.

For some people, this is the only credit card available to them. The store assistants are untrained in financial education and told to sign people up in return for cash incentives. Thus, those without suitable disposable incomes often find themselves spending on these cards without understanding how to manage them and racking up expensive, ill-afforded debts in the process.

The irony of store cards guarantees that shoppers spend their money at a specific shop or chain of shops. Yet, a store card costs more in interest than a regular credit card that you can be used everywhere. Therefore, you should always shop around. Only be loyal to a specific store if the product is the best value. If your credit history isn't great and your credit score needs work, a store credit card can help you build up your credit to be strong enough for a standard credit card. Many stores offer benefits to cardholders, too.

How Store Credit Cards Can Impact Your Credit History

A closed-loop store credit card can only be used in one store or a group of stores. A closed-loop card works like a credit card in the store that issues it. For example, a Macy's card can be used at all Macys, and a Walmart store card can be used at Walmart and Sam's Club stores. These cards can help or hurt your credit history, depending on how you use them. If you use your card every month and then pay off at least the minimum balance, or if possible, the total amount owed, a store card can be a valuable financial tool to build your credit history.

Make sure the store has reported your card to the big three credit bureaus, as well. If you miss a payment or do not pay the minimum amount, it can ding your credit after 30 days. If your credit utilization is too high, it can hurt your credit report. You want to keep your credit utilization below 30% if you're going to improve your credit history and score.

While it might be easier to qualify for a store credit card with a lower credit score, consider how you plan to use the card to build up your credit history.

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When You Should or Shouldn't Open a Store Credit Card

Suppose you have strong credit, responsible spending habits, and your credit utilization isn't too high. In that case, a store card might be helpful if you are making a large purchase or regularly shop at a store that offers excellent rewards for its store card users. If you are trying to improve your credit and don't anticipate having problems paying your balance, a store credit card can also be helpful.

You shouldn't open a store card if you can't afford to pay at least the minimum balance, if you are a compulsive shopper, or if the store credit card's APR is too high. If you are struggling to build your credit, opening a new card will show up on your credit history, and if you use it, it might drive up your credit utilization ratio higher than you want it to be.

Can They Be Beat at Their Own Game?

The number one rule is not to go anywhere near store cards unless you are certain that you will pay the balance in full each month. And never be seduced into buying something just for the sake of getting a discount.

If you are confident you can do both of these things, you could consider taking advantage of store card perks. Many store cards offer a discount for signing up, such as 20% off the first time you spend on it. Don’t simply spend it all on a small purchase. Sit tight until there’s something expensive in the store that you need to buy, thus maximizing the discount.

If there are exclusive cardholder events and offers, you can keep the card to secure an invitation. Many store cards have special evenings and offers, a bit like a membership club. There’s nothing wrong with keeping a store card just for this.

Alternatives to Store Credit Cards

If a store card isn't right for you, there are alternatives to signing up for one. A rewards-based conventional credit card may offer discounts, cash-back, and deals at eligible stores if you qualify.

If you find you frequently shop at big box stores, like Walmart, Costco, or Target, you could sign up for one of their credit cards, which offers store-card type rewards but can be used anywhere Visa or Mastercard (depending on the issuer) is accepted. A simpler alternative to a store card—use cash.

The Bottom Line

Store cards do not pose a problem if you pay off the balance within the interest-free period. If you do have a balance sitting on a store card, consider switching it to a 0% balance transfer credit card, allowing you to make inroads into the money owed and eliminate interest charges.

Never use store cards for borrowing money on a long-term basis. If you do, debt problems can soon mount up, and the original discounts and item prices will be small fry compared to the interest payments you could find yourself making.

Store Credit Cards FAQs

What Is the Average Interest Rate for Store Credit Cards?

The average interest rate for store credit cards is higher than conventional credit cards, often as high as 24.40%. However, some store cards have a lower rate like Target, and some even higher rate, like Walmart, which is 26.99%.

Do Store Cards Help Build Credit History?

Yes. Just like a credit card, store cards can help you build your credit history. However, you have to make timely payments of at least the minimum balance, plus keep your credit utilization below 30% to positively impact your history.

What Happens if You Never Use a Store Credit Card?

If you open but never use a store credit card, nothing will most likely happen. However, the issuer could close your card due to inactivity.