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For brand loyalists, store credit cards can certainly be worthwhile. And for those with less-than-ideal credit, they can also be easier to qualify for than other kinds of cards.
But there are reasons that store credit cards are easier to get: They come with certain drawbacks — such as high APRs, low credit limits and inflexible rules — that general credit cards do not.
It's not that store cards can't be valuable. Lately, they've seriously upped their rewards game, and you may also snag discounts, perks, free shipping, access to special sales and more.
But before you apply for a store credit card, there are drawbacks and caveats to be aware of.
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Store credit cards tend to have higher APRs
As of this writing, the average APR on a credit card that incurs interest is around 16%, according to the Federal Reserve. Your rate will hinge on your credit scores, which indicate to the card issuer how much risk it is assuming by approving you for a credit line. Generally speaking, the better your credit, the lower your APR will be.
But store credit cards tend to have APRs that can range well above 16% — sometimes as high as 25% or beyond. Consider, for instance, the Banana Republic Encore Mastercard®. The ongoing APR is 33.24% Variable APR. Or The Home Depot Consumer Credit Card. The ongoing APR is 29.99%, Variable APR.
So if you're an applicant with, say, only fair credit (FICO scores between 630 and 689), then yes, you might be approved for a store credit card. But you'll be paying very high interest on any balance you end up carrying.
🤓 Nerdy Tip
When you use a general credit card for a purchase, the store receives only the purchase price, while the bank that issues the card collects any interest that might accrue on that purchase. Use a store card, and the retailer shares in the windfall from any interest. (You can avoid interest charges entirely if you pay your balance on time and in full each month.) Store credit cards often have low credit limits
Another way store credit cards mitigate the risk of extending credit is to offer lower credit limits than you might get with general credit cards.
If a cardholder is going to default, the risk to the retailer is a lot lower if the limit on the card is only $300 rather than, say, $5,000.
But a lower credit limit can affect your credit utilization, aka the amount you owe as a percentage of your available credit. Credit utilization is a major factor in your credit scores, and in general, the lower the better — but it can be hard to keep that figure low when your credit limit is also low.
For example, if you have a store card with a $300 credit limit and you put $150 worth of purchases on it, your credit utilization ratio is 50%. Ideally, 30% or below is a good guideline.
Store credit cards — and their rewards — can't always be used everywhere
There are two basic flavors of store credit cards:
- Closed-loop cards: These kinds of store cards have the name of the store or retailer on them and can be used only with the store brand or related brands.
- Open-loop cards: These store cards carry the name of both a merchant and a payment network (Visa, Mastercard, etc.). As such, they can be used inside and outside the brand — essentially anywhere credit cards are accepted.
Either way, when you have a retailer's credit card, it can give that merchant leverage over your spending choices. Closed-loop cards are obviously more limiting because the merchant can keep you (and your spending) completely within its walled garden.
But even with open-loop cards, there are limitations: They may allow you to earn rewards on any kind of purchase, but you might only be able to redeem those rewards within the store brand.
Also, store cardholders often get offers that are applicable only if they use the card. That provides an incentive to not only return to the store but also use the store's card, as opposed to a general-purpose credit card that offers rewards.
🤓 Nerdy Tip
If you have an open-loop store credit card — one that runs on a payment network like Visa or Mastercard — you are well-protected in the event that you need to dispute a charge or get a refund. But if you have a closed-loop card without the backing of such a payment network, you could be more vulnerable. But store credit cards do have upsides
Because of their higher interest rates, lower credit limits and limited usability, store cards aren't always the most efficient credit tools out there. But because they're easier to qualify for, they can be a boon to those who have borderline credit or are just establishing credit, as long as they're used responsibly. (That is, payments are made on time and, ideally, in full every month.)
On top of that, store cards — especially open-loop cards — have drastically improved their offers and incentives in recent years, with an eye toward becoming your everyday, top-of-wallet card.
Take the Prime Visa. It earns:
- 5% back at Amazon.com and Whole Foods.
- 2% back at restaurants and gas stations.
- 2% back on local transit and commuting (including rideshare).
- 1% back on all other purchases.
You can redeem rewards toward Amazon.com purchases, sure, but also for cash back, travel and gift cards. These benefits earned it a 2021 NerdWallet Best-Of award, as our pick for "Best Credit Card for Staying at Home."
The information related to the Prime Visa credit card has been collected by NerdWallet and has not been reviewed or provided by the issuer of this card.
