Applying for a store credit card? Watch out for this big red flag

With the holidays on the near horizon, a store credit card could make sense. But brace yourself for a big shock when you apply.

With the Federal Reserve easing interest rates during the COVID-19 saga, more financial consumers are turning to new credit cards to take advantage while APRs are low. That makes sense – as long as the card opened has a reasonable interest rate.

Enter the store credit card. Also known as a retail credit card, these cards can offer consumers select perks like cashback rewards, discounts on purchases, and accumulated card user points. Like all credit cards, they offer upsides and downsides.

Why consumers open a store credit card

“Because store credit cards only focus on a particular store, the benefits are limited,” said Alex Miller, founder of Upgraded Points, a travel and leisure advisory company. “But they do offer advantages.”

Store credit cards are very easy to get: “Oftentimes, they’re sponsored by little-known banks, and come with restrictions or severely limited perks that make them quite easy to get,” Miller said.

They’re a great way to build credit: “Store credit cards are perfect for teens or others who need to repair damaged credit to be able to work their way up into better credit cards,” Miller added.

Good perks: “If you are a frequent shopper at whatever store the card is for, usually the perks are pretty decent and there are significant discounts,” he said.

Credible can help you compare different types of reward cards, including various rates and fees that come with them. Use these free tools to find the recommended card for your needs.


A big store credit card disadvantage: APR sticker shock

What store cards don’t offer is a decent interest rate – a fact that might escape a store card hunter looking for a deal for holiday shopping.

“While each card is different, store credit cards frequently carry very high rates, which is a problem if the cardholder doesn’t pay the balance in full every month,” said Freddie Huynh, vice president of credit risk analytics with Freedom Debt Relief.

The interest rates on store credit cards are usually much higher than other cards, typically exceeding 20% or even 25%.

“If you carry a balance on a store credit card, that adds up quickly and ends up negating the benefit of any discounts you receive,” said Amy Maliga, a financial educator with Phoenix-based Take Charge America, a nonprofit credit counseling agency.

Financial experts point to more downside risks associated with store credit cards.

Low credit limits: Store credit cards often start out with low credit limits, sometimes just a few hundred dollars in credit. “If you immediately charge up at or near the limit, that can cause problems for your credit utilization rate and potentially trigger a decline in your credit score,” Maliga said.

Store cards have “acceptance” problems: “Unlike a regular credit card, a store card is only accepted by a specific store or group of retailers,” said Lauren Bringle, an accredited financial counselor with Self Financial, fintech company in the credit and savings market. “A regular cashback or rewards credit card gives you greater flexibility.” If you're looking for discounts or bonus cash back, check out the various credit cards listed on Credible's website and get an easy breakdown.

You may not be saving money: If you save money on a purchase, but then carry credit card debt for years after, you didn't really save any money.

“While store cards may draw you in with promises of initial savings, if you spend more paying back accrued interest than you saved on buying something, you did more harm to your budget than good,” Bringle said. “If you open a store card, have a plan to pay back what you owe as soon as possible.”


Good alternatives to store credit cards

If a cardholder doesn’t opt for a store credit card, there are other options.

“Good alternatives to store credit cards include cashback credit card or rewards credit cards,” Huynh said. “The crucial part is to pay off the balance in full and on time every month.”

It helps to be realistic with other cards – especially rewards cards.

“A reward card is only as good as your ability to use the rewards,” Huynh added. “You might have a card that accumulates airline points, but if you find it’s difficult to redeem the points for the flights you want, it may lose some value to you.”

Card consumers can visit Credible to easily browse through and select a rewards credit card that best meets their unique financial needs.


One often-overlooked option to store plastic is a traditional bank debit card.“With the ongoing COVID-19 pandemic, many retailers prefer (or only accept) plastic,” Huynh said. “A debit card prevents overspending, as funds are withdrawn immediately from your bank account.

The takeaway on store credit cards

Credit card consumers who sign on for store credit cards usually require a sense of discipline, along with a healthy long-term view of their personal financial picture.

“You have to have a lot of self-control when signing up for store credit cards,” said Cameron Burskey, partner and managing director at Cornerstone Financial Services. “I’ve seen it time-and-time again when a client has three or four maxed out store credit cards and they're paying over a 20% interest rate.”

Visit an online credit card marketplace like Credible to compare card options and choose the best options.