Store Credit Cards
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If you’ve made a purchase at a major retailer recently, chances are you were offered at least one store credit card at the till. The offer likely came with a promotion, such as 10% of your purchase. But is it worth taking? In this section, we’ll explain what store credit cards are, how they work and what to consider before getting one.
What are store credit cards?
Store credit cards are rewards cards offered by a specific retailer, like Best Buy. The cards come in two basic varieties: those that have rewards tied to a particular store but can be used anywhere, and those that can only be used at the store in question. Some stores issue both kinds of cards, so it’s easy to mix the two up. One way to know the difference is to look at the card itself: if it has the logo of a credit card company, like VISA or MasterCard, it can be used anywhere.
Like a regular credit card, store credit cards can be used to make purchases on credit. Some stores also offer cards with deferred payment options. For example, a store might say you don’t have to pay any interest, as long as you pay with their store credit card and pay off the balance within 12 months. However, if you don’t pay it off in full by the end of this period, interest is retroactive to the purchase date – even if you are just a penny short.
What are the advantages of store credit cards?
The biggest advantage of using a store credit card is usually the immediate reward(s) you receive for signing up and using the card. For example, the HBC credit card offers an immediate 15% off your first purchase on eligable items sold at Hudson's Bay. Stores offer these types of incentives to get you to both make a purchase and apply for their cards.
Another advantage is that retailers also offer rewards every time you use the store credit card, such as points that can be redeemed for merchandise at a later date. In addition, a store may offer discounts specifically for cardholders. With a Canadian Tire credit card, for example, you'll earn at least 4% in Canadian Tire Money per $1 spent at Canadian Tire, Sports Check, Mark's, and Atmosphere.
The final advantage of store credit cards is their availability. People who otherwise may not qualify for a regular credit card may still be approved for a store credit card. In addition, the ease of the approval process means that, unlike regular credit card applications, there is not a week-long wait to see if you qualify. Store credit cards tend to be given right on the spot, after you’ve completed the questionnaire.
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What are the disadvantages of store credit cards?
The biggest disadvantage of a store credit card is the annual interest rate charged on purchases. It is not uncommon to see an interest rate of 24.99-29.99% on these cards. This is well in excess of the 19.99% that most credit cards in Canada charge, and it severely eclipses the 12.99% or so that you can find if you shop around a bit.
In addition, store credit cards can come with expensive administrative costs, like late payment fees and account inactivity fees. These are often buried in the fine print of the card offers, but can exceed the benefits you may receive by using the card. This is especially true if you don’t end up shopping at a particular store as much as you anticipated.
We mentioned that the availability and ease of qualification for store credit cards is an advantage, but it is also a disadvantage. The ease of access to these cards makes them too tempting to resist for some people, especially when the allure of an immediate discount on a purchase is front and centre in their minds. Furthermore, qualifying for store credit cards are usually easier than other credit cards, so many people are granted cards who do not have the best credit history.
Case study: James and the store credit card
James is about to make a $1,000.00 purchase at an electronics retailer, when he is approached with a store credit card offer. By using the card to pay for his large purchase, James will save 10%. In addition, if he pays off the balance in full by the end of the year, no interest will be charged. The card comes with a 29.99% interest rate, if the balance isn’t fully paid off. His current credit card charges just 15.99% interest.
First, let’s see the benefit of the discount James will receive if he uses the store card:
|Purchase Price||Price - 10% Discount||Savings|
|$1,000.00||$1,000.00 x 0.90 = $900.00||$100.00|
James would save $100 by applying for and using the store credit card for this purchase.
Now, let’s consider how the two cards might compare if James forgets to pay off the entire balance on time after a one-year period.
|Option||Discount on Purchase||Interest on Balance for 12 Months||Net Charges (Discount – Interest)|
|Existing Credit Card||$0.00||$159.99||- $159.99|
|Store Credit Card||$1,000.00 x 0.10 = $100.00||$900.00 x 0.2999 = $269.91||- $169.91|
As you can see, even though the store credit card comes with a significant one-time discount, James is better off sticking with his existing credit card. The lower interest rate more than offsets the missed savings of the store credit card option.
Final word on store credit cards
Do you shop at one store all the time and always pay off your credit card balance in full? If you answered yes to both questions, you could save money by signing up for that store’s credit card. However, if you only go to the store every now and then, or sometimes are late with your credit card payments, steer clear of a store credit card. The rewards are enticing, but the costs of owning one can be staggering.