Behind the Marketing Pitch: Store Credit Cards' Real Perks and Pitfalls

By Claire Tsosie

Store-branded credit cards often make what seem to be fantastic offers: instant access to easy credit, exclusive discounts and 0% financing. But when you take into account their limited usability and high ongoing interest rates, those perks don't always translate to much in the way of savings.

Before applying for a store credit card, examine the numbers to see how much you'd really benefit. Here are some store credit card drawbacks and benefits to take into account when making a decision.

Limited opportunity for use

Store credit cards tend to be "closed-loop," meaning they're accepted only at the store that offers them, and sometimes partner stores. "Open-loop" store cards, on the other hand, have a Visa or MasterCard logo and can be used anywhere those kinds of cards are accepted. Rewards on closed-loop cards often come in the form of store credit, rather than cash back or transferable points. As a result, rewards can be slow to earn and require more work (and spending) to redeem -- especially at specialty outlets, such as home improvement stores, department stores and jewelry stores.

Take clothing outlets, for example. The average U.S. consumer spent $1,786 on "apparel and other services" in 2014, half as much as on "food at home," according to data from the Bureau of Labor Statistics. Many clothing stores offer store cards, but grocery stores usually don't. In most cases, a general credit card that offered bonus rewards on groceries would yield much more in rewards than a store card for a certain clothing boutique.

On the other hand:
Big rewards at stores that sell everything

It's worth noting that a store card can be versatile, if the store sells a wide variety of goods. At discount retailers or warehouse stores -- Target, for example -- you can buy groceries, clothing, household goods and more under the same roof, which could make a store card more valuable than a general rewards card.

Several store cards also offer unlimited 5% rewards on store purchases. General credit cards with such a rewards rate usually impose a spending cap. Other common membership benefits include free shipping on online purchases and exclusive sales for cardholders. If you do a lot shopping in one place, these benefits could add up quickly.

High APRs

Store credit cards often come with high interest rates -- APRs between 25% to 30% are common. At such rates, even a modest balance of $200 could easily rack up more than $30 in interest over a year, assuming equal monthly payments. Because most store cards come with low limits, carrying a balance on these cards can also hurt your credit score by raising your credit utilization ratio. Nearly 40% of consumers report carrying balances on their credit cards, according to the Federal Reserve; if you're one of them, consider how much you'll pay in interest on your store card.

On the other hand:
Accessible credit and no annual fees

You can completely avoid paying high APRs on store credit cards by paying your bill in full each month. Most store cards offer an interest-free grace period of 21 to 25 days after the credit card's closing date. And unlike many rewards credit cards, store cards don't typically have annual fees.

You can usually qualify for a store card with fair or poor credit, too, which is one reason their APRs tend to be higher than those on general rewards credit cards. As long as you borrow sparingly and pay your bill in full each month, getting a store card could be a relatively inexpensive way to build credit while earning rewards.

Deferred interest

Unlike 0% APR offers on general credit cards, the 0% financing offers on store credit cards usually hit you with retroactive interest if a purchase isn't paid off during the promotional interest-free period. Say you buy a refrigerator for $2,000 and get a 0% financing deal for 12 months on your store card. If you still owe $1,000 after that first year, you'd be retroactively charged the full ongoing interest on the balance from the day you made your purchase.

Ultimately, 43% of subprime borrowers ended up paying retroactive interest in a lump sum on such cards, according to a study from the Consumer Financial Protection Bureau.

On the other hand:
0% financing when you can't get a 0% APR credit card

Zero percent APR offers available on general credit cards typically require good or excellent credit,  something that most U.S. consumers don't have.

If you can't qualify for a general credit card with 0% APR, getting special financing through a retailer may be the next best option. Just make sure you pay it off before the back-interest kicks in, so you don't end up with more debt than you can afford.

Store cards vs. general rewards cards

Store credit cards General rewards credit cards
Credit required Often available to those with fair or even poor credit. Usually requires good or excellent credit.
APR 25%-30% APR 15%- 20% APR
Annual fee None, usually $58, on average, according to a NerdWallet study
Acceptance Closed-loop store cards: Accepted at certain stores and partner outletsOpen-loop store cards: Accepted almost everywhere Accepted almost everywhere
Rewards • 0% financing (deferred interest charged on unpaid balance when promotional period ends)• High earn rates and unlimited rewards at certain stores

• Rewards typically come as a store credit or upfront discount

• 0% APR (no deferred interest charged on remaining balances when promotional period ends)• High earn rates in certain categories, but often with spending caps
• Rewards typically can be redeemed for cash back or toward other expenses, such as travel
Best for • Someone who mostly shops at one store• Someone who has subpar credit and wants to earn rewards • Someone who shops at several different stores• Someone with good or excellent credit looking for versatile rewards

The verdict

When it comes to competitive in-store deals and easy credit, store credit cards have most general cards beat. But in practice, these cards are only a good fit if you're loyal to a certain store and can avoid paying the high ongoing interest rates.

The deciding factor? If you think a card could tempt you to spend more than you normally would, either on purchases or in interest, you're better off avoiding it.