When signing up for a store credit card makes sense

Many store credit cards come with terrible terms and conditions and high interest rates, but they shouldn't always be dismissed outright. 

Phil Coale/AP/File
A customer signs his credit card receipt at a Target store in Tallahassee, Fla.

We’re all familiar with the offer. Whenever we shop with large retailers, the person working the checkout counter will inevitably offer a credit card – typically with the promise of a big discount on that day’s purchase. This scenario will play out for more and more people in the coming weeks, as the holiday shopping season dawns upon us. While most people casually dismiss these offers, is that the right financial move? Not always. While, for the most part, store credit cards come with terrible terms and conditions and high interest rates, they shouldn’t be quickly dismissed. This guide goes over the good, the bad, and the ugly of store credit cards. It’s best to first understand the shortcomings of these cards, which is why we’ll talk about those before any benefits.

Why Store Credit Cars Are Considered Bad

It’s not uncommon for store credit cards to charge consumers APR of 24% or more. That is nearly 10 points higher than the average interest rates on ordinary everyday credit cards. Anyone who is unwilling or unable to pay off their purchases at the end of each and every month is in for a world of financial pain with these products. The high interest charges are sure to outweigh any potential savings these cards have to offer.

Store credit cards also traditionally offer low credit lines. They typically start off consumers with just $500 for new purchases. Why is this a problem? Part of what influences your FICO 8 credit score, one of the most widely used models in lending, is something called “credit utilization”. The more of your total credit line you use up every month, the worse it will be for your credit score. It’s easy to drive up your utilization, when the credit limits are as low as they are on store cards.

Finally, it’s worth noting that store credit cards will typically only reward you in the form of store credit. Regular cards have rewards that come in all different shapes and sizes. You can earn cash back, statement credit, airline miles and even hotel points. However, when you make purchases with a store card, your rewards will only be good if you plan to shop more with that particular store. While not necessarily a negative, consumers should always be aware of the form their rewards will take before deciding to sign-up.

Why Signing-up For Store Credit Cards Might Be Worth It

So long as you understand the above-mentioned shortcomings associated with store credit cards, you can consider taking advantage of what they have to offer. Store cards typically offer rewards on two fronts: at the time of purchase and on future purchases. The most attractive discount is typically offered on the purchases consumers make when they first open the card in-store. These will sometimes give as much as 25% off that day’s purchases. This is better than what you can get out of most reward programs, including the best cash back cards. Store credit cards also give decent rewards rates on future, ongoing, in-store purchases, often reaching as much as 5%. However, at the same time, these cards are very poor at rewarding all other purchases. That means they don’t make for good day-to-day spending. While this is generally true, note that there are a few exceptions to this rule.

We Can’t Stress This Enough: Read the Terms

It’s worth noting again that you should always read through a store credit card’s agreement before applying. You should specifically look at the interest charges and fees. These are the two most common areas where store credit cards tend to put consumers in a bad spot. So long as you’re comfortable with the fee structure of a card, and you don’t plan to pay interest, signing up for it can be financially net positive. Also, as a rule of thumb, you shouldn’t apply for store credit cards that will charge you monthly or annual fees.

This article first appeared in ValuePenguin.

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