Store Credit Cards: Are They Ever Worth The Value?

During the checkout process for most purchases, you are confronted with the question, “Will you be using your (insert store name) credit card to pay for your purchases today?”

You respond, “No, thank you. I don’t have a store card.”

Then comes the question: “Would you like to open an account with us today? You’ll get 20 percent off your purchase.” And then they stand there smiling at you. Tempting you. Baiting you…

Are Store Credit Cards Worth the value?

Most folks are aware that store credit cards don’t provide the value and the perks that major or traditional cards offer. But are they ever a good idea?

Let’s do the math.

Pros of Store Credit Cards

Store credit cards could potentially work for you if you fall in the following categories:

• Poor credit
• No credit or you are trying to establish or rebuild your credit history
• You use that retailer frequently and/or for large purchases.
• The card offers special financing, perks, bonus points or cash back
• You pay the entire balance off every month

Store cards are an attractive option for those with poor or no credit as they are easier to get than traditional cards. Most store credit is provided in a “closed-loop” system, meaning the card can only be used by the retail store—and any affiliates—sponsor. This greatly reduces the risk to the financiers underwriting the card.

According to Bankrate.com, when used wisely, store credit cards can positively impact your credit score long-term. When used modestly, they can add points to your credit score and by keeping your balance low, you can also lower your debt-to-credit ratio, which comprises 30 percent of your overall credit score.

You also have access to better and more frequent store deals and perks. The caveat to this “benefit” is that in order to take advantage of these benefits, you must use the card more—meaning you are spending more. You can get that coveted one time sign up discount and other smaller discounts along the way, however, the system is designed to make the retailer rich, not you.

Cons of Store Credit cards

Overall, store credit cards provide very little value. For starters, the annual percentage rates (APR) on these cards are notoriously high. To add insult to injury, retailers are scaling back tremendously on the deals and perks they offer—making their cards far less valuable.

In a recent survey conducted by CreditCards.com, surveyors found that the average APR for retail cards is a whopping 23.84 percent. The national average for all credit cards hovers around 15 percent. They also found that only half of retailers are offering sign up discounts and rewards.

The survey collected and aggregated data on every card offered by the top 100 retailers in the U.S. and the results confirm what most people suspect. Retail credit cards are the devil…

Here are some of their findings:

• Almost half of the cards carry an APR of 25% or higher
• Store credit cards—in general—are less secure than traditional cards
• Cards that do offer a reward program or special financing offers are only beneficial for frequent and consistent shoppers or for large purchases

Another con for these cards—especially for big ticket items—are the “special financing,” offers touting no interest for a specified amount of time—usually, six, 12 or 18 months. This works and can be an amazing deal IF you pay the balance in full before the promotional period ends. For most store cards, if you fail to pay the balance in full by the end of the promotional period — even if you owe just a few dollars — you’ll be responsible for paying the full interest amount on the original purchase price. Sneaky, right? But this is a common, perfectly legal practice that’s stated in the fine print of the card’s terms and conditions.

Always do the math

In a few, very rare cases, a retail credit card can actually save you money. Your decision, to open an account, however, should not be made during the checkout process. If you are considering a store credit card do the math:

Step One: Ask yourself “am I going to be able to pay the balance in full every single month?” If the answer is yes, proceed to step two. If the answer is no, WALK AWAY.

Step Two: Ask yourself “Am I sure I will have the discipline to pay off my balance every month?” If the answer is yes, proceed to step three. If the answer is no, WALK AWAY.

Step Three: Compare rates, promotions and deals. Sites like CreditCards.com, WalletHub and Bankrate.com have calculator tools that can assist you in comparing offers and finding the best card for your situation.

Step Four: Hold yourself accountable. Set limits and conditions for using the card and stick to them. Have a friend or parent serve as your accountability partner.

Step Five: Set a time limit. You don’t need to keep a store card forever. You have it for a specific purpose and a specified amount of time. Once the card has served its purpose get rid of it. Store cards are short term relationships. They’re flings. Don’t over-commit and fall in love. Once the relationship has run its course, end it.

For the average person, store credit cards are a less optimal choice than traditional cards or saving up and paying cash for purchases (what a novel idea). People with special credit issues can make store cards work if they are disciplined, fully understand the terms and conditions and understand that store cards are a short-term solution.

Featured image by B Rosen on Flickr, CC 2.0.