4 reasons store credit cards are (almost) always a bad idea
"Would you be interested in saving 20% on this purchase by applying for our store credit card?"
If you've ever done much in-store shopping, you've likely heard that offer many times. Retailers often have workers pitch credit card sign-ups at checkout, using discounts and other welcome offers as a ploy to reel you in.
And we'll admit that even we've been tempted to take advantage of an offer when making purchases at our favorite stores. But we almost always resist because we know that while an additional discount (especially on a large purchase) can be appealing, store cards rarely provide long-term value. Here's why.
Limited rewards
Most retail credit cards only offer significant rewards on store purchases, which doesn't provide much value — unless you spend thousands of dollars at a particular store each year.
For example, a Gap credit card will reward 5 points per dollar only on purchases at Gap Inc. brands (Gap, Old Navy, Banana Republic and Athleta), which can be redeemed for a $5 reward at 500-point increments.
If you spend an average of $100 a month with any of these brands, that equates to only $60 in rewards at the end of the year, and that reward can only be used for store purchases. While you may not get 5 points per dollar with a standard credit card on these same purchases, the rewards you do earn can be used on a number of more valuable redemption options.
These cards also typically offer abysmal benefits. If you spend over a certain threshold on some cards, you may qualify for store status with more savings opportunities. But you won't get many other ancillary benefits that travel credit cards offer. You may not be rewarded for spending elsewhere; your points may only be good at that specific retailer.
Related: The best credit cards for buying clothes
Higher interest rates
At TPG, we always advocate paying off your credit card bills in full each month. Letting a balance carry over on your card isn't beneficial, regardless of your type of card. Unfortunately, things happen and debt accumulates. In fact, the average American has a credit card balance over $5,000.
A survey conducted by CreditCards.com revealed a current average annual percentage rate (APR) of over 28% for all retail store cards. The average APR for general credit cards comes below 23%. If you carry a balance, the higher APRs on store credit cards could cost you hundreds of extra dollars in interest payments.
Translation: The store earns the rewards, not you.
Poor long-term value
Store credit card welcome offers are built on answering a simple question: Would you like to save some cash today? Of course, the answer is yes. Everyone wants to save some extra bucks. That one-time discount can deliver a sizable benefit if the purchase is big enough. However, it's important to note that many of those appealing bonuses are capped.
For example, if you open a Macy's credit card, you can save 20% that day and the next, but the savings can't exceed $100. This might make sense if you're planning to buy $500 worth of clothes and goods from Macy's. You can knock off a sizable chunk of your final bill. However, if you're spending more (or less), it might not be worth the effort.
While that $100 off is certainly a nice perk, it's important to comb through a range of other details that will matter after the one-time discount. Outside of understanding your APR, transaction fees and other essentials, you must consider the everyday benefits of using the card — not just the day you open the account.
How often do you shop at the store? If you're constantly at Macy's, that credit card can be useful thanks to 10% rewards points on most purchases. However, if you only buy a few pairs of jeans or outfits every year, that card isn't worth it in the long run. You can use other cards to earn rewards on your store purchases while also enjoying other benefits.
Related: The best store credit cards
Chase's 5/24 rule
If you are hoping to apply for Chase cards down the road, it's important to strategize your credit card applications. Chase has an unofficial 5/24 rule where you can't be approved for a Chase card if you've opened five or more personal credit card accounts across all banks within the past 24 months.
While some business cards are excluded from your 5/24 count, pretty much every other card account you open will add to your 5/24 number — including store cards. We don't suggest jeopardizing future approvals for high-value Chase cards (including Chase's business and cobranded card options) for a low-value store card.
There is a valid argument for not letting 5/24 dictate your entire credit card strategy, but it's something to keep in mind before applying for a store card. You don't want to eliminate the opportunity to take advantage of offers on top cards like the Chase Sapphire Preferred Card or Chase Freedom Unlimited by falling for a 20% one-time discount and a card you'll only use a few times a year.
And even if you're well under 5/24 with Chase, adding a new store credit card will almost certainly result in a hard inquiry on your credit report and a temporary drop in your credit score. While these will typically fall off your report within two years, it's important to keep in mind how applying for a new card impacts your score — and decide whether doing so for a store card is worth it.
Related: How credit scores work
Is a store credit card ever worth it?
While you're almost always better off with a rewards credit card such as the Chase Sapphire Preferred Card, there are a few scenarios when having a particular store card makes sense.
For one, store cards are generally easier to be approved for. When used appropriately, you can build your credit with a store card before moving on to higher-value cash-back or travel cards. Similarly, store cards can help boost your credit utilization ratio and repair a low credit score.
Additionally, if you spend enough money at one specific store, you may benefit from the store-specific earning and discounts you'll get with a store card. Just calculate the rewards you'll earn before committing to the card.
The key in these situations is to avoid carrying a balance on that card each month. If you want to use your store card, pay off what you charge in full each month so you won't have to worry about the high-interest rates.
Related: Store cards vs. cash-back cards: Which one should I get?
Bottom line
Taking advantage of high discount offers in exchange for a credit card application can be tempting, but retail credit cards rarely provide any real value to your wallet. Most of the time, you'll be better off strategically using rewards credit cards that earn cash back or transferable points. High APRs, low long-term value, mediocre benefits and the fact that they'll take up a Chase 5/24 slot are all reasons to be cautious when considering a store card.
However, that doesn't mean that they are never a good idea. There are situations where your spending habits could make a specific store card worth it. It's all about making sure you'll be able to use it to maximize purchases alongside the rest of your credit card lineup.
Additional reporting by Emily Thompson.