Are store credit cards worth it?

How store credit cards work

Two main qualities separate in-store credit cards from traditional cards: where you can use them and where you can redeem rewards.

The card can only be used in store: The main thing that separates store credit cards from traditional “general purpose” credit cards is where you can use them. Most store credit cards are closed-loop cards, meaning they can only be used at the retailer that issues them. For example, your department store’s credit card can only be used at that department store or on its website.

In contrast, non-store credit cards are open loop, so they can be used anywhere the network – Visa, Mastercard, American Express or Discover – is accepted. If you swipe a closed-loop store card anywhere other than the issuing retailer, the purchase will be declined, as the card networks will not recognize the card as a valid payment option.

Rewards can only be used in-store: The card itself isn’t the only limited-use thing. Unlike the cash back or points you earn with a regular open-loop card, the rewards you earn with store credit cards generally operate in the same closed loop as the store cards themselves. This means that you will only be able to redeem your rewards for purchases through the retailer that issued the store card.

Other than where you can use a store card and its rewards, there are no major differences between store credit cards and general purpose credit cards. Applying for a store card involves the same credit investigation and credit check as applying for a regular card. Once you’re approved, your payment history and card balance are reported to the credit bureaus, just like any other credit account. You’ll also be charged interest if you carry a balance past the due date (and store credit cards have notoriously high interest rates).

What’s in it for retailers?

Retailers want to get store credit cards in your wallet for several reasons.

First, loyalty – if you have a store card that earns retailer-specific rewards, you’re more likely to shop with that store. Also, since your store card rewards can only be used with this retailer, you’ll need to return to redeem your rewards, making additional purchases more likely.

Another reason retailers are pushing store credit cards is to circumvent the expensive processing fees they pay on regular credit cards. When the payment is handled internally, the merchant does not pay a network to process it.

Last, but not least, a store-issued card is a data collection tool, helping the store find better ways to sell to you. What you buy, how and when you shop – all of this information is analyzed by the retailer to determine how to get you to spend more.

The Real Cost of Reducing a Store Credit Card

After checking in your items, a cashier says you’ll get 10% off everything you buy – if you apply and get approved right away. If you have a little extra time, the offer can be quite compelling.

The only problem? With most store cards, you give up many for very little. The actual cost of this 10% discount could lead to a significant decrease in your credit score.

For starters, an application can affect your credit score. The card issuer pulls your credit to see if you qualify, which results in a credit check on your credit file. Too many difficult inquiries in a short period (one to two years) can lower your credit score and negatively affect your ability to get approved for other forms of credit. Difficult inquiries can linger on your credit report for up to two years, whether or not you’re approved for the card.

There will also be other impacts if you are approved. Store credit cards are treated like regular cards when calculating your credit score, and your new card is included in your average account age and usage rate.

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