If you do a lot of shopping, you’ve probably heard the sales pitch: “You can get a discount on today’s purchase if you apply for our credit card.” The cashier may even push back if you initially decline.
It’s tempting, whether because of the discount or the low credit requirements. But the offer’s usually not worth it, and here’s why.
Every time you apply for a credit card, the hard credit check can knock a few points off your credit score. So, it’s important to avoid applying for credit unless you need it. As such, here are five reasons it’s not worth applying for every store-branded credit card you see.
1. They charge high interest rates
Many store credit cards charge upwards of 20% APR, much higher than the 14.89% average, according to the Federal Reserve. So, if you happen to carry a balance, you’ll pay a heavy price for it.
What’s more, store-branded credit cards that offer 0% APR financing do so with a caveat. Rather than offering a true 0% APR promotion, they offer what’s called “deferred interest.” This means that if you don’t pay off the balance in full by the end of the promotional period, the issuer will charge interest retroactively based on the original balance.
2. You’ll be stuck with a low credit limit
Even if you have great credit, you could be stuck with a credit limit of just a few hundred dollars. That might not seem like a big deal, but it could cause problems with your credit score.
Your credit utilization, which is calculated by dividing your credit card balance by your credit limit, is a big factor in your credit score. Experts generally recommend keeping it below 30%. So, if you have a $400 credit limit and put $200 on the card, your 50% credit utilization could damage your score.
3. You can’t use them anywhere else
Most store-branded credit cards are closed-loop credit cards, meaning you can only use them at that particular store. This means that you’d have to get another credit card to use elsewhere. And you’ll still get offers from other stores to apply for their credit cards.
4. You can often get better rewards with another credit card
Despite being designed for loyal shoppers, many store-branded credit cards offer mediocre rewards. And some, including the Kohl’s Charge card, don’t offer rewards at all. To make up for second-rate rewards, some store-branded cards offer special discounts and offers, but there’s no guarantee you’ll get one every time you shop.
Even if the card does offer rewards, you can usually get a better rewards rate and better acceptance with a general-purpose card that offers bonus rewards on certain spending categories.
5. They encourage you to spend more
Some store-branded credit cards send out special offers to cardholders to encourage you to shop more often.
If you take advantage of these discounts to buy stuff you need, that’s not a problem. But if you just spend the money to avoid missing out on the discount, you’ll end up overspending. And, if you can’t afford to pay off your balance in full each month, you’re stuck with high interest debt and a potentially high credit utilization.
Two reasons you might consider a store-branded credit card
There are only two reasons you should even consider a store-branded credit card.
You shop there often
For example, the Target REDcard offers a 5% discount on every purchase, not just the first. So, if you shop there frequently, you’ll get a lot of value out of the card over the long run.
In other words, don’t do it for the upfront discount. Do it only if the card offers long-term value and you can control your spending and pay off your balance in full each month.
You’re working on building credit
Store-branded credit cards have low credit requirements, so you may be able to use one to get started on building or rebuilding your credit history. If this is the case, you should consider the store card to be a temporary solution to your credit needs.
Some alternatives to store-branded credit cards
To avoid getting stuck with a bad credit card situation, here are two other options to consider.
An open-loop store-branded credit card
Some retailers offer a branded credit card that you can use anywhere. For example, the Amazon Visa Rewards card and the Costco Anywhere Visa are technically store-branded credit cards. But they also offer stellar rewards on a variety of everyday purchases.
Of course, these cards are still targeted to loyal customers, so you should still only apply for these credit cards if you shop at the retailer often.
A good general-purposes credit card
Instead of focusing on just one retailer, get a credit card that offers great rewards on all your purchases. Be sure to shop around and compare several credit cards to find the one that works best for your needs.
In most cases, it’s not worth it to get a store-branded credit card. And in every case, it’s not worth it to get one simply for the one-time discount you get when you apply.
When you get that offer at the cash register, ignore the one-time discount and consider the long-term value of the card. If you think it won’t be worth it or you’re concerned it’ll encourage you to overspend, consider other alternatives to ensure that you maximize your rewards without getting into trouble with debt.