Department store credit cards are often a tempting offer. Some retailers promise gift cards—even enough to cover your entire purchase and then some—or a hefty discount just for signing up for their credit card right there on the spot.

However, is applying for department store credit cards the best way to save or do you end up paying for it in the end? Let’s find out the pros and cons of store credit cards 

Why Do Stores Push Retail Credit Cards?

So why are department stores so anxious for you to sign up for one of their retail credit cards? What is the benefit for the store? 

Loyalty

Retail credit cards often come with exclusive perks, discounts, or rewards programs that can incentivize customers to shop more frequently at that particular retailer. 

Bypass Large Processing Fees

Retailers may benefit from lower transaction fees associated with store credit cards compared to other payment methods like credit cards issued by major banks.

Also, department store credit cards can help improve a retailer’s cash flow by providing immediate access to funds when customers make purchases.

Collect Data

When customers sign up for department store credit cards, they provide personal information that retailers can use to gather valuable insights into customer behavior and preferences. This data can help tailor marketing efforts and product offerings.

Types of Department Store Credit Cards

Not all department store credit cards are the same. There are two main types of store credit cards: open loop and closed loop. 

Open Loop

These cards can be used anywhere that accepts the payment network shown on the card (e.g., Visa, Mastercard, American Express). For example, the Amazon Prime Rewards Visa Signature Card can be used at any store that accepts Visa.

Closed Loop

Closed-loop credit cards can only be used at the specific store or chain of stores that issued them. They’re by far the most common type of store card. Examples include Target Circle Credit Card, Lowe’s, and Home Depot.

Benefits of a Department Store Credit Cards

Are department store credit cards bad? Well, it’s not all bad news when it comes to retail store credit cards. There are a few scenarios where they are beneficial.

“Member” Perks

If you open a store credit card with a retailer you shop at often, you can quickly earn additional discounts, grow loyalty points, get free shipping on items, or receive early alerts to store sales. This is a good way to save on future purchases or to save up for a larger purchase. However, continued alerts of sales and discounts may entice you to make purchases that are not necessary.

Large Introductory Benefits

Store cards may feature a sign-up bonus of 10% or more off a purchase with the card, or offer a reward for spending a certain amount within three months of opening your account. With an open-loop card, you may earn rewards on all purchases, not just on spending with a specific retailer.

Some department store credit cards also offer interest-free financing for a limited period. This can be helpful for large purchases that you want to spread out over time without paying interest. Other cards may offer deferred interest, where you don’t have to pay interest on your purchases for a certain period as long as you pay the balance in full by the due date.

Building Credit

A common question people ask is “Do department store cards build credit?” And the answer is yes, they can help. Store cards have a less intense application process and can be easier to obtain than a card issued by a major credit card provider. Additionally, their low spending limits make it harder to rack up large amounts of debt, making repayment easier. A history of consistently paying off your entire balance, on time, further strengthens your credit status.

Disadvantages of Department Store Cards

While there are a few “pros” to department store credit cards, the drawbacks can be even greater. Far outweighing the membership perks and discounts, high interest rates and damage to your credit score are more costly.

High Interest Rates

Probably the biggest drawback of department store credit cards is the incredibly high interest rates they charge. The interest rates on retail store cards continue to grow and the average interest rate is now just under 25%. In comparison, the average interest rate on a general-purpose credit card is in the mid-teens.

Oftentimes stores will employ a “no interest for 12 months” promotion to further encourage enrollment. But if you have not paid off your retail credit card balance by the end of the 12-month period, you’ll be strapped with large monthly payments once the interest kicks in. If you don’t have the ability to pay off your total balance each month, you shouldn’t open a store credit card.

Negative Impact on Your Credit Score

Do store credit cards affect credit scores? While retailer-specific credit cards can be one tool to build credit, in many cases they can have a negative impact on your credit. Credit scores are measured not only on the amount of debt you have, but also on the amount of debt you can potentially amass. So every line of credit you open represents dollars you may potentially have to repay one day and can negatively impact your credit score.

Additionally, you should not apply for a new card if you have hopes of purchasing a new home or a new car in the near future. New credit accounts are seen as a risk when assessing your credit score and could cause you to pay a higher interest rate on your future loans.

Limited Usefulness

Another disadvantage is you can’t use department store credit cards anywhere you want. Department store credit cards are typically designed for use at specific department stores or chains. This limits their usefulness compared to general-purpose credit cards, which can be used with a wider range of merchants. 

If you don’t frequently shop at the stores affiliated with your department store credit card, you may miss out on potential savings and rewards offered by other retailers.

Risk of Overspending

Credit cards can make it easier to spend money than cash. The convenience of swiping a card can lead to impulsive purchases and overspending. If you’re not careful about managing your shopping, you could end up carrying a balance on your department store credit cards. This can lead to accumulating debt and paying high interest charges.

Differences Between Store Cards VS. General Credit Cards

Department store credit cards offer exclusive benefits but come with limitations. While these cards often provide cardholder-exclusive discounts and may be easier to obtain, they typically have higher interest rates and lower credit limits than general-purpose credit cards. 

Additionally, retail credit cards may not be as widely accepted as other cards, limiting their usefulness outside of the branded store and its partners. Applying for a store card at the checkout counter can be tempting, but it’s important to research the terms and conditions carefully before making a decision.

Already Have a Department Store Credit Card?

Did you give in and sign up for a department store credit card? Would you like to relieve yourself of sky-high interest rates? Diamond Credit Union often offers great options for improving your credit health.

Balance Transfer: You should consider working with your credit union for a balance transfer. Moving your outstanding balance to a lower-interest credit card, such as Visa Diamond Credit Cards, can help you pay off your debts in a timelier manner.

Loan Health Check-up: Diamond Credit Union also offers free Loan Health Check-Ups to members, where we will meet with you to review your credit report and discuss how your credit cards impact your financial health. Take control of your credit before your credit controls you.