Store credit cards: 6 ways to stay out of trouble

Used the right way they can work for you, as long as you don't carry a balance

By  |  Updated: October 12, 2017

Brian O'Connor
Award-Winning Journalist
Writes about personal finance and blogs at "The Funny Money Blog."

Store cards: 5 things to consider to stay out of trouble

Americans love a bargain, and what could be better than an instant discount at the cash register for filling out a quick credit card application? But signing up for a store credit card can mean interest rates of nearly 30 percent and perks that can vanish if the retailer goes out of business.

Store cards can be a good deal in the right situation: They can help you snag discounts, special financing deals, exclusive sales, rewards points to spend at your favorite stores, and can even help boost your credit rating.

On the downside, store cards carry higher interest than typical credit cards, come with low limits, often give out chintzier rewards than traditional cards, and if the retailers closes shop, cardholders can lose all their rewards and be left holding a useless card.

Considering a store card? Here are six things to keep in mind:

1. Don't carry a balance
Overall, experts say, this is the No. 1 rule if you do get a store card (you'll see why in a moment.)

2. Watch for high interest rates.
Since the interest rate on store cards is high, “You have to be very wary of them because what you think you might be getting in rewards, you’ll be paying in interest,” says Brian Riley, director of credit advisory services for Mercator Advisory Group, a financial services research and advisory firm. “They do require some disciplined use.”

Most store-branded cards are charging interest rates of more than 25 percent, according to the 2016 CreditCards.com retail cards survey, and some come with rates that are close to 30 percent. With rates like that, the key is to avoid carrying any kind of balance, warns Beverly Harzog, author of “The Debt Escape Plan: How to Free Yourself From Credit Card Balances, Boost Your Credit Score, and Live Debt-Free” and a credit card expert.

“If you choose a store where you shop a lot, it can save you money, as long as you don’t carry a balance,” Harzog says. “When you’re talking about an annual percentage rate of 25 percent, it’s easy to get in trouble.”

Consumers who do end up with a balance on a high-rate store card should stop charging new purchases and methodically pay off the balance, or look into whether a balance transfer to a lower-rate card will save money.

STORE CARDS AT A GLANCE
  • Watch for high interest rates. Most store cards are charging APRs of more than 25 percent.
  • Shop for other ways to build credit. A secured card can be a sound alternative.
  • Read the fine print. Resist the temptation to accept an offer at the cash register without reading the terms and conditions first.
  • Consider options for major purchases. Layaway plans or transfers to online money market accounts can help you save or pay for big-ticket items.
  • Closed store = closed card. If the retailer goes out of business, you could lose any accumulated rewards and/or your ability to charge new purchases.
STORE CARDS AT A GLANCE
  • Watch for high interest rates. Most store cards are charging APRs of more than 25 percent.
  • Shop for other ways to build credit. A secured card can be a sound alternative.
  • Read the fine print. Resist the temptation to accept an offer at the cash register without reading the terms and conditions first.
  • Consider options for major purchases. Layaway plans or transfers to online money market accounts can help you save or pay for big-ticket items.
  • Closed store = closed card. If the retailer goes out of business you could lose any accumulated rewards and/or your ability to charge new purchases.

3. Shop for alternatives to build credit.
On the flip side, the higher interest rates on store cards mean that the underwriting standards can be less strict, which makes store cards one way to build credit if you don’t have an extensive credit history or a stellar credit score.

“Mainstream retailers, like Macy’s, might take a chance on you with a low credit limit, since you’re captive to the store,” says Riley. “Companies such as Fingerhut are good at getting people’s credit re-established. They tend to be higher-priced, but if you want credit, that’s a start. The retailer already has profit built into the sale, so they can assume a little more credit risk.”

However, consumers also can build credit with a secured credit card, by becoming an authorized user on another cardholder’s account, or with a credit-builder loan from a credit union.

4. Read the fine print first.
Harzog warns consumers to check the store card’s terms and conditions before taking up a clerk’s card offer at the checkout register.

For example, a card that offers 0 percent interest for six months might be deferring interest during that time. If the cardholder doesn’t pay the balance in full before the introductory rate expires, the total deferred interest may get added to the bill.

You also should understand whether the card you’re signing up for is a private label card that’s good only at the store that issues it, or whether it’s a co-branded card that works across a network, such as Visa or Mastercard.

“Never go into a credit card offer blind without reading the fine print,” Harzog says. “It’s not fun, but do it. If you’ve already read the terms and conditions and you know you can use the card properly and afford to pay it off, then when you’re in line at the register, you can go ahead.”

“Never go into a credit card offer blind without reading the fine print. If you’ve already read the terms and conditions and you know you can use the card properly and afford to pay it off, then when you’re in line at the register, you can go ahead.”

5. Consider other options for major purchases.
Alternatives to a store card include setting up regular transfers to online money market accounts that pay higher interest rates than local banks so you can simply save up for a major purchase. Consumers who want to lock in a good sale price can consider stores that offer layaway plans, in which the buyer makes regular payments to the store at litle or no cost.

Of course, the easiest alternative is to shop around to find the best credit card for you before grabbing a store-card offer. The lower interest rate and other benefits of a standard or secured card might be a better deal than a store card’s perks when you add it all up.

6. Closed stores mean a closed card.
Another potential downside to store cards is what happens if the store goes out of business. Any accumulated rewards can be wiped out and, if it’s a store-only card, the card will be worthless.

In cases in which the card is part of a network, your account may be moved to a new card, and even with store-only cards the finance company that issued the original card may offer you a new one. If that happens, consider it an entirely new account and read the terms and conditions.

“If you’ve been a good customer, they’ll probably want to keep you,” says Riley. “If not, they’ll want to push you off the books.”

While store cards bear the retailer’s logo, they’re backed and issued by private financial firms that still will want their money back even after the stores are shuttered.

Consumers can damage their credit and end up being hit with late fees and penalties if they assume that just because the retailer has gone out of business their card balance has been wiped out.

Cardholders with a balance should continue to make payments, but won’t need to pay off the entire balance immediately and can continue to make payments over time.

“Call the old issuer and get some information on how they plan to proceed,” says Harzog. “When you get any notice in the mail, or email, read everything.”

Bonus pro tip: Still unsure what retail card is right for you? Check out CreditCards.com’s reviews of the most popular store cards. We’ve looked at their rewards programs, special financing deals, APRs and other perks, as well as their potential pitfalls.

What’s in it for retailers?
Retailers aren’t pushing their own private-label plastic just so they can hand customers more perks. For stores being forced to shutter outlets and lay off workers as shoppers shun brick-and-mortar outlets for online shopping, the income from branded cards can be a significant chunk of the bottom line.

Take Macy’s, which offers store-branded cards that can only be used at the retailer, as well as co-branded cards that can be used anywhere American Express cards are accepted. The retailer estimates that income from the cards will total about $750 million dollars this year, which would amount to more than 40 percent of Macy’s projected 2017 profit. 

See related: Retailer gone bankrupt? What cardholders should doStore cards urged to reconsider 'deferred interest' credit card offersHow will closing store cards affect my credit score?


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Updated: 10-23-2017

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