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How many credit cards do you have in your wallet? Were any of them impulse decisions made at a cash register when offered a discount to sign up? Many retail and department stores across America offer their own store credit cards and/or co-branded credit cards. They incentivize consumers to sign up for their cards by offering discounts on their merchandise. With more people signing up for these cards every day, it’s important to understand their pros and cons. Do store cards build credit? How do they compare to bank credit cards? We’ll answer these questions and more to help you discover whether a store credit card is a smart decision for you.

Pros and Cons of Store Credit Cards

Pro: Access to exclusive discounts and perks

Con: The card and its discounts have restrictions

One of the major benefits to a store credit card is the option to have your purchases at the participating retailer discounted. They will often advertise exclusive discount offers to their cardholders, special sales, and rewards programs for frequent buyers. If you shop at a specific store often, then you could benefit from these discounts.

The caveat is that these discounts have limitations, and often what you spend on interest each month is greater than the savings. Common limitations are discounts only up to a certain amount, only on the first purchase, rewards only if you spend more than you normally would, and sales that aren’t that impressive. Make sure to research all the so-called perks associated with a store credit card before you sign up.

Pro: You could build your credit

Con: You could hurt your credit score and end up in debt

Do store cards build credit? Yes. Just like any credit card, they will provide additional credit history information. If you pay on time, that credit history will show consistent payments. On-time payments will reflect on your credit score positively. Additionally, access to more funds can make it easier to keep your credit utilization ratio below 30%. This means that you carry balances on your credit cards that equal less than 30% of the total credit limit. For example, if your store credit card has a limit of $1,500 – then only carry a balance less than $450 each month. This can help your credit score as well.

For more tips on how to use a credit card to improve your credit score, read our guide here.

On the flip side, a store credit card could completely ruin your credit if you run into problems paying off your balance. Store credit cards have astronomical interest rates, and can quickly balloon your monthly bill if not paid in full. This creates a vicious cycle where you can’t pay off the card, and the interest keeps adding up. This debt will hurt your credit utilization ratio, your on-time payment history, and if sent to collections – make it hard to get approved for other credit cards and loans in the future. The only way you can build your credit with a store card is if it is used responsibly. Since the entire premise of the card is to make you spend more at that store, using it responsibly becomes exceedingly difficult.

Pro: Those with lower credit scores can still be approved

Con: Higher interest rates and low credit limits create a high-risk environment

It is incredibly easy to get approved for a retailer’s credit card. Those with low credit scores can get approved for cards that they would never be able to get at a financial institution. This means that people who already have problems paying off debt get access to additional spending temptations.

While these cards could be a solution to building credit for lower credit scores, we recommend using secured credit cards instead. Secured credit cards at financial institutions require an up-front deposit for your credit line. This helps you build your credit back at a lower interest rate with less risk.

The major reason we don’t recommend store credit cards is that they carry outrageous interest rates. High interest rates create a high-risk environment if you’re unable to pay your balance in full each month. And of course, the retailers are hoping you do just that. This is because they are profiting off the interest you pay. If you keep a balance on the card, then they make more money. In fact, the New York Times reports that Macy’s makes 39% of their total profits from their store credit cards. Another giant retailer, Kohls, makes 35% of their total profits from store credit cards. Since stores are relying on credit cards to bring in income, they can resort to aggressive sales tactics to make more people sign up, and high interest rates to rake in money.

Let’s compare the average interest rates between bank credit cards and store credit cards.

Bank Credit Cards vs Store Credit Cards

*Interest rates current as of May 2017

Banks

Bank of America AmeriCard – 11.74% to 21.74% APR

BB&T Bright Card – 11.9% to 20.9% APR

AmeriChoice Visa Platinum – 8.9% to 14.9% APR

Stores

Macy’s – 25.99% APR

Amazon – 26.74% APR

TJ Maxx – 27.74% APR

The Final Verdict

Store credit cards are not all bad – if used responsibly. For this reason, we only recommend opening a store card if you have multiple years of experience using and paying off credit cards. Also, only open a store card if you feel you can pay the balance in full every month.

We do not recommend store cards for new credit card users like teenagers or those with poor credit. If you’re unable to get approved for traditional cards, ask about secured credit cards first before resorting to retailers.

Looking to improve your credit score with a card?

Discover our guide – How to Use a Credit Card to Improve your Credit Score. We’ll break down the three proven methods to increase your score with a card. Read it now!