Navigating the world of store credit cards is like dodging rain drops in storm; nearly every big retailer dangles one in front of you with the promise of discounts and ongoing perks.
But just like the best auto loans are rarely found on the lot, the best credit cards are hardly ever offered in stores. Most store credit cards don't compare in value and usability to cards offered by financial institutions. In fact, some store credit cards are downright predatory.
If you're considering signing up for a credit card with your favorite store, read on to learn more about the ins and outs of store credit cards – and why they're hardly the "amazing deal" most retailers make them out to be.
How Store Credit Cards Work
Store credit cards stand out from traditional cards in two key ways: where you can use them and where you redeem the rewards.
Also known as closed-loop cards, store credit cards are limited to use within the retailer's ecosystem, i.e., on their website or in their stores. On the other hand, general-purpose credit cards like Mastercard, American Express or Discover can be swiped anywhere within their network. If you try to use a closed-loop store card anywhere besides the issuing retailer, it will result in a declined transaction.
Similarly, the rewards earned with store credit cards operate within the same closed-loop system. Unlike the versatile cash back or points earned with open-loop cards, the rewards you earn on your store card can only be redeemed at the issuing retailer.
Why Retailers Push Store Credit Cards
Retailers want to get store credit cards in your wallet for a few reasons.
First, having a store credit card ensures loyal customers. People who have a store credit card are more likely to shop at that store over competitors. Plus, since the rewards can only be used at that retailer, customers with the store credit card are likely to make even more purchases in the future.
Additionally, store credit cards allow retailers to circumvent the hefty processing fees associated with conventional credit cards. By handling payments in-house, retailers can bypass these fees and increase their profits.
Last – but certainly not least – store credit cards are an invaluable tool for retailers to collect data and consumer insights. Every purchase made with a store card provides retailers with valuable information about customers' purchasing habits, preferences and behaviors. Retailers use this information to tailor their marketing strategies to effectively target and entice customers.
3 Reasons Store Credit Cards are Almost Always a Bad Idea
Limited Rewards
Most retail credit cards only offer rewards on store purchases, which doesn't provide much value unless you spend thousands of dollars at a particular store each year.
Take, for instance, the Gap credit card offers a generous five points per dollar spent but only within Gap Inc. brands like Gap, Old Navy, Banana Republic and Athleta. Accumulating 500 points yields a modest $5 reward, redeemable exclusively for store purchases. For those spending an average of $100 monthly across these brands, the yearly reward totals just $60.
While traditional credit cards might not match the five points per dollar spent, their broader rewards spectrum often allows for more versatile earning and redemption options.
Our Signature Rewards and MyRewards Visa® Credit Cards offer 3x points on gas, 2x points on groceries and 1x point on everything else. Plus, you can redeem your points for cash, gift cards, travel and more.
Higher Interest Rates
Keeping a balance on your credit card isn't good, no matter what type of card you have. Sometimes, however, life throws curve balls and debt accumulates. In fact, the& average American has a credit card balance of $6,501.
A survey conducted by Bankrate revealed a current average annual percentage rate (APR) of over 28% for all retail store cards. Some retailers even have cards with APRs over 33%. If you carry a balance on these cards, the interest rates could cost you hundreds of dollars in interest payments.
Retailer Credit Card Rates*
| Retailer Card | Annual Percentage Rate (APR) |
| Target Credit Card | 29.95% |
| Walmart Rewards Card | 29.99% |
| Amazon Store Card | 29.99% |
| GAP Inc. Credit Card | 29.99% |
*Rates listed are as of 4/29/2024.
In contrast, credit union rates are regulated to never exceed 18.00% APY, making credit union credit cards competitive with not only store credit cards but big bank cards too.
Poor Long-Term Value
Store credit card welcome offers are built on answering a simple question: would you like to save some cash today?
Naturally, most people would say yes. Everyone wants to save some extra bucks, especially when the store clerk tells you how much you can save if you sign up right now. Unfortunately, these perks are often short lived and come at the expense of high interest rates on balances moving forward and dings on your credit score.
The Real Cost of a Store's Credit Card
Imagine you're at the checkout, and the cashier offers you a tempting 15% discount on your purchase if you apply for a store credit card right then and there. It sounds like a great deal, right? But before you jump at the offer, consider this: the cost of that discount might be more than you bargained for.
Firstly, applying for the card could ding your credit score. When the card issuer checks your credit to see if you qualify, it leaves a mark called a hard inquiry on your credit report. Too many of these inquiries in a short time can lower your score and make it harder to get approved for other loans or credit cards. Even if you're not approved for the card, the inquiry sticks around on your report for up to two years.
Plus, if you do get approved, your new store credit card is treated just like any other credit card when it comes to calculating your credit score. This means it affects factors like your average account age and your credit utilization rate, which could impact your score further.
So, while that 15% discount might seem tempting in the moment, it's important to weigh the potential long-term consequences for your credit before applying for a store card on impulse.
Our Apple FCU Visa Credit Cards are an excellent alternative to closed-loop store credit cards. With no annual fees, rates below 18.00% APR** and competitive rewards programs, you can get all the perks of a store credit card without the downsides.
To learn more about Apple FCU Credit Cards, schedule a video appointment, call us at 703-788-4800 or visit a branch.
**APR = Annual Percentage Rate. Rates are based on an evaluation of applicant credit. Your actual APR will be disclosed at the time of credit approval. Not all applicants will qualify for the lowest rate. Credit Card rates apply to cash advances, balance transfers and outstanding balances on purchases.
