Are Store Credit Cards Worth It? 4 Things You Need to Know
You’re pushing your shopping cart toward the registers at your favorite department store.
Your cart is doing its best impression of Santa’s sleigh, overflowing with gifts for everyone on your Christmas list.
And then, as you approach the registers, you see it; a beacon of savings that seems to have been hand-delivered from the North Pole straight to your checking account: a sign promoting big savings if you sign up for the store’s credit card.
You do some quick math and realize that offer – whether it’s $25 off a $200 purchase or 10% off everything you buy – can add a little extra breathing room to your holiday shopping budget.
Bigger budget? Check. Better savings? Check. But are store credit cards worth signing up for? That’s an entirely different question.
As good as store credit cards seem, they have a very clear set of positives and negatives; the latter could ultimately make the card more of a burden than anything else.
1. Store Credit Cards Capitalize on Impulse Purchases
Let’s get back to that opening scene. You finally get up to a register with all your stuff and the cashier makes one last pitch for the store’s credit card. That pitch usually includes a one-time discount or limited-time offer.
This pitch is designed to play to your impulses – those desires to buy or sign-up for something without thinking.
Philip Graves, a consumer behavior expert at Psychology Today, calls this scenario the “loss aversion switch,” which is the scientific term for FOMO, fear of missing out.
“Stores have learned that we’re very susceptible to the loss aversion switch, our innate concern to avoid feeling bad in the future,” Graves wrote in a 2013 article. “Add in a discount that we’re told or we assume won’t last forever and our unconscious focus switches to the fear we’ll miss out on the deal.”
Here’s the bottom line: Don’t automatically sign up for a store credit card because you’re afraid you’ll miss out on big savings. There’s a good chance you’ve already scored some amazing deals that didn’t require you to open another credit account.
2. Store Credit Cards Often Use Something Called “Deferred Interest”
When I bought my first digital SLR camera, I used a Best Buy store credit card because they were offering a 0% interest deal where I wouldn’t pay any interest for a year.
I thought this was a great deal, so I did it. What I didn’t know was that the card’s no-interest deal was actually a deferred-interest deal.
If I didn’t pay off the entire balance by the end of the promotion period, Best Buy would charge me interest on the entire original purchase. This is a unique distinction among store credit cards because non-store cards don’t utilize deferred-interest – once the promo period is over, you’re only charged interest on the leftover balance.
Here’s how this works in real life. Say you buy a $600 TV with a store credit card. The interest rate is 20%. You have $50 left to pay once the promo period is over, but you’re charged interest on the full $600. Your interest payment will be $120.
If you use a non-store credit card to make the same purchase at the same interest rate with the same 0% offer, your interest payment on that remaining $50 will be around $10.
3. Store Credit Cards Have Big Rewards for In-House Purchases
In my research of cash-back credit cards, I’ve found that consumers can get a card that offers between 1.5% and 2% cash back on nearly every purchase.
Store credit cards break this mold by offering higher discount and cash-back rates on purchases made at the store or online. For example, Target’s REDcard will earn you 5% off your purchases at the register. Walmart will give you 3% statement credit when you use their Walmart MasterCard for purchases at the store.
While those rewards rates are incredible, remember that the bonus or discount you earn is a bonus you’ll have to spend at the store. You can’t cash it out to buy whatever you want, wherever you want.
This lack of flexibility could be labeled as a drawback but, considering that big-box stores like Target and Walmart tend to be our go-to locations for household items and groceries, those rewards are valuable because we use them on purchases we’re already making.
4. Store Credit Cards Will Offer Different Levels of Their Credit Cards
One of the most confusing things about store credit cards is that many of the biggest stores have varying levels of credit cards designed for people with excellent, good and fair credit.
Best Buy is a good example of this system. They have a My Best Buy Visa Platinum, My Best Buy Visa Gold, My Best Buy Credit Card Preferred and My Best Buy Credit Card. Confusing, right?
The main differences between these cards – and pretty much any multi-level card offers – are interest rates and the zero- or low-interest offers.
Consumers with better credit will get lower interest rates and longer intro periods, whereas consumers with lower credit scores with higher interest rates and shorter promotional periods.
Wrapping It Up: Be Smart About Your Store Card Choice
In my research, I’ve found that the best way to choose the right store card is to do some analysis of how you spend your money and how you anticipate spending your money during the holidays.
If you do most of your grocery shopping at Walmart, then their store credit card offer isn’t a bad choice because that 3% rewards rate is as good as the best non-store credit cards.
If you’re going to buy most of your Christmas presents at Target, then their 5% discount just might make it worth it to sign up for their store card, particularly because they’re giving REDcard customers early access to their Black Friday deals.
Kohl’s is offering an extra 30% off your first purchase with their Kohl’s Charge card, which could come in handy if you’re buying hundreds of dollars in clothes this holiday season.
However, if you don’t buy groceries at Walmart and your holiday shopping isn’t sending you to Target or Kohl’s or any other store offering discounts on store-card purchases, consider going the traditional route and selecting a cash-rewards card like the Chase Freedom Unlimited or Capital One Quicksilver.
Both cards have 15 months of zero interest, 1.5% cash back on all purchases and a $150 cash bonus when you spend $500. Those three features alone elevate these cards above many of the credit accounts you’ll get at big-box stores.