What are store credit cards and how do they work?

Quick Insights

• Store credit cards are issued by retailers and can be used to shop at their store or network of stores.
• Unlike traditional consumer credit cards, store credit cards are generally not widely accepted at most retailers beyond the issuing retailer.
• Like traditional consumer credit cards, store cards can help you build up your credit.

“Would you like to open a credit card with us today? You can save 10% on your purchase if you do.” Who hasn’t been met with this question at least once while checking out at a major retailer? In this article, we’ll discuss what store credit cards are, where you can use them and some things you may want to consider before taking a store representative up on their offer.

What are store credit cards?

Store credit cards are issued by a retailer for use in their store or at affiliated brands. The biggest difference between store credit cards and general credit cards is where they can be used.

Store credit cards can sometimes only be used at the retailer they’re associated with, whereas credit cards can be used anywhere cards are accepted. Credit cards can be classified as a closed loop or open loop card:

• Open loop: a general-purpose credit card that is widely accepted by most businesses
• Closed loop: a credit card that can only be used at designated retailers

There is an exception to closed loop cards. Some may be used at multiple retailers and brands that are under the same corporate ownership. For example, you can get a credit card through Gap that can also be used at Old Navy, Banana Republic and Athleta—Gap’s partner brands.

Co-branded credit cards

Co-branded credit cards are another type of card that often offers the loyalty rewards of a store card with the wider acceptance of a traditional consumer credit card. A co-branded card is a dual partnership credit card that brings together a credit issuer and a company. One party is typically a bank or financial institution, and the other is a brand relevant to the card's purpose and perks — such as a retailer, gas station, airline or online vendor.

The cardmember may gain access to exclusive rewards with the card's retail party but the card can be used widely to purchase goods or services. Often, purchases made at non-affiliated companies can still help you earn rewards. In some cases, those rewards may then be redeemable with that co-branded company. For example, if your co-branded card is associated with an airline, any purchases you make with the card could help you earn discounts on airfare.

How store credit cards work

You may be offered the chance to sign up for a store card while checking out in person or online, or via an offer in the mail. Signing up for a store card may often come with a perk (like a certain percentage off your purchase) if you’re approved.

The application process typically happens quickly and is initiated by the store. The store will run a credit check based on a few pieces of info, like your:

• Address
• Date of birth
• Estimated annual income
• Social Security number

If approved, you’ll be issued a card. You can make purchases at the store using that card. Payment terms will vary depending on the card. Like personal credit cards, you will be expected to pay off your card in a timely manner and will accrue interest on any balance not paid in full.

Do store credit cards build credit?

Using a store credit card can help you build credit. Traditional activities you do to build credit, like using the card and regularly paying it off, may help to boost your credit score. In addition, having a store card and a traditional consumer credit card can help to diversify your credit mix and improve your credit utilization ratio.

Your credit utilization ratio is the percentage of credit you have versus how much you’re using. Ideally, you’ll want to keep your utilization at 30% or lower. If you add a store card and use 30% or less of the available credit limit on the card, that may help your ratio.

Benefits of store credit cards

Store credit cards can be beneficial, especially if you’re a frequent shopper at that store. Stores may offer special bonuses and enhanced discounts to those who use their store card to make purchases. This may be beneficial if you routinely spend money at the store.

Traditional vs. store credit cards

There are a few important distinctions between store and traditional consumer cards that you may want to consider before signing up for a store card:

• Rewards: Any rewards you earn with the card will likely only apply to the store or any affiliated brands. Unlike most traditional consumer credit cards, the rewards are typically limited and cannot be used for goods or services not affiliated with the store or its partner brands. ·
• Interest rates: Interest rates on store cards may be higher than those on traditional consumer credit cards. If you don’t routinely pay off your balance, you might be paying more in interest than you would be with a traditional consumer credit card.
• Credit limits: Credit limits on store cards are often lower than those on traditional consumer credit cards.
• Penalties: Penalties on store cards also can be higher. For example, late payment fees may be higher than traditional consumer credit cards.

As with any credit card, read the terms and conditions to understand what the cardmember expectations are.

In summary

Store credit cards may offer discounts and perks for being a loyal shopper at their store. Keep in mind though that you may only be able to use these cards at the store they are associated with. In addition, you may find that interest rates are higher and credit limits are lower than traditional consumer cards. If you’re looking to build up your credit and frequently shop at the store offering you a card, you may find it beneficial to add a store card to your wallet.