Updated on 09.10.14

Why Store Credit Cards Are A Bad Deal

Trent Hamm

I used to have a big pile of in-store credit cards for various chain stores. I would go into a store ready to make a big purchase and the person at the counter would say, “You can save 10% by signing up for our store credit card!” and I would think, “Yeah! It’s like a 10% off coupon – and I don’t even have to pay right now!”

Sure, this offer sounds great on paper, but the truth is that these offers are set up to devour you if you don’t diligently pay your entire bill. For me, the end result of this was a huge amount of high-interest credit card debt that took me years to pay off.

Let’s walk through the pitfalls of such offers, step by step, so you can see how they work.

Chains that use these cards are ones that often see a good deal of credit card use. Shoppers are accustomed to pulling out their credit card anyway to make relatively expensive purchases. Thus, shoppers in these stores already match the target audience for these cards: individuals who frequent this specific store and regularly use credit to pay for their purchases.

Often, the offer is only given when the 10% savings will be “significant.” This is key: if you’re about to make a $200 purchase, the cashier can quickly indicate to you that using the card will save you $20, which is quite appealing to the ears. It makes an expensive purchase seem less expensive, and also creates the appearance of actually putting significant cash in your pocket.

The credit card usually has no grace period (or only a short introductory period). As a result, you begin getting charged interest on your purchase the second the new card is activated and swiped. Often, your first bill will already have a significant finance charge on it.

The credit card often has a high interest rate – 22.99% is a common APR on such cards. This interest rate basically means that in about five months, your 10% discount has been eaten up by the finance charges – and a period longer than that means that they’re money ahead.

The credit card often has a very tiny minimum payment. Such offers often use an incredibly tiny minimum payment, usually just 3% of the total balance. This means that your first bill on a $180 purchase would have a minimum payment of just $5.50 or so. The problem is that if you just do those payments, you’ll be paying the minimum payment for 50 years. Even worse, you’ll pay $318 in interest alone, just to save $20.

In general, in-store credit cards generally are not worth the risk – you’re better off using your own rewards card instead. If you simply must do it, pay off the entire balance as soon as you can. If you don’t, any benefit from getting the card will soon be washed away.

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  1. I’ve had a number of store cards over the years. I don’t get them anymore because it’s rarely worth it to me – I make very few big purchases like that. If I do it’s for a computer and they don’t typically give you 10% off on that, just no interest for 12 months or so.

    Still, I have never run into a situation where there is no grace period. That strikes me as possibly illegal (given the consumer protection laws) to not give a person a chance to pay off card. Let me know which nation-wide chains do this so that I can begin the boycott.

  2. MidnightUT says:

    I wouldn’t mind knowing a bit more about this myself. I think my wife and I have signed up for this kind of deal 2 or 3 times over the last 3-4 years the last been a year or so ago when we were able to stack a 20% Target coupon plus the 20% target card initial signup discount when we purchased our dining room table after we got married.

    Each time we have signed up for these cards it has saved us 20% on a large purchase ($500 or more) that we were going to make anyway. In each case we’d sign up at the register, get the discount, and in most cases walk over the stores customer service desk pay off the account in full before even leaving the store. Then in the next couple of days we cancel the card and cut it up. This was before I recently learned that it actually hurts your credit to open and close credit card accounts.

    Is it still such a bad idea on purchases you were about to pay cash for? I will definitely start asking about the grace period before I sign up, and I guess I’ll stop closing the accounts even if I don’t intend to continue using the accounts. It’s just hard for me to pass up 20% off and potential savings of a couple hundred dollars.

    Thanks for the post!

  3. Sun says:

    I don’t think store credit cards are particularly bad. You have to treat them the same way as a regular credit card. If you pay off your bill on time for all other cards, there’s no reason to be late for store cards.

  4. Trent Hamm Trent says:

    That’s the problem, Sun: the reason stores give this discount is to get you on board with a strictly inferior credit card that has no consumer benefits at all except for the initial discount. MidnightUT has the best policy of all if you’re going to use them, but even then you’re facing a potential ding on your credit report just to do that.

  5. efipo.com says:

    I think some store credit cards are bad, but there are tons that are really good. Kroger cards saves you $.10 per gallon, circuit city card puts 5% into rewards, and 4% for best buy. I think most mall cards are junk, but I can see them turning their in-store credit cards to rewards cards too.

  6. Isn’t that initial discount the key though? You get something for nothing as long as you are diligent. If you can get that and cancel then there’s no consumer detriment either (except for the potential ding on the credit report). Depending if you need the credit any time soon even that’s not a big issue.

    That ding could be minimized by keep the card for a year or two and then canceling it so it doesn’t hurt your rating. I haven’t seen any with an annual fee, so if you lock it up and forget it, it’s not a problem.

  7. rps says:

    They’re a good deal if you pay the whole thing off. I spent $300 at Kohl’s, and got $30-$45 off with a card application, paid the whole thing off with the first bill, and never used the damned thing again.

    Also, you usually just have to apply for the credit card. When my wife had bad credit, she applied for the Target card, knowing full well that they would reject her, and got the discount without using their card.

  8. Mr.Cytizen says:

    As long as you pay it off on time, everything should be ok. However, the stores build on the possibility that you will not pay it off on time. This is going to get very expensive for you very quickly. I would recommend accepting a store’s credit card for the discount, buy something, cut up the card afterwards (to avoid accidental further use) and make sure you pay it off exactly on time. This, of course, only makes sense on larger purchases where the discount is really worth it.

    Stores hate this kind of thing but its the best you can get out of these cards.

  9. Cameron says:

    I did this with Amazon recently. If you got a card, you got $30 off at Amazon, which made some Christmas presents cheaper. I love the cancellation phone call later: “No, there’s no problem. I just signed up for the 30 bucks.”

  10. ihavewebfeet says:

    You also have to remember that every time you sign up for a new account, your credit score will take a hit. Oddly, even getting an account, paying it off within a month and closing it will cost you points on your report!

  11. Schwamie says:

    While I didn’t do a x% off by signing up, I did fill out one for Sears for $10 off of an item. We bought a potty trainer for $11.37 (after tax). After they processed my info and was approved, I paid $1.37 for the potty seat/trainer (and paid off the entire charge) at the register. I received the card in the mail about a week ago and cut it up! I think it was worth it, since this is NOT an item I was going to get used!

  12. Maria says:

    I used to work retail at an upscale major department store. At my employee orientation I was told to really push the cards on customers so that they would come back to OUR store when it was Christmas and they were OUT OF MONEY because they already had store credit and could keep buying presents. In addition to this, employees were given a $4 bonus for each credit application resulting in a new account (along with stories of extremely successful sales associates who earned hundreds of dollars in bonuses around Christmas). The number of credit applications you had taken was also discussed at every performance review. This is not an institution designed to save you a dime. Stores (even the “nicer” ones) pressure their employees to pressure their customers to sign up for a card so that they can take your money.

  13. keeko says:

    …actually, lots of stores offer 0% interest grace periods ranging from 6 to 18 months for larger purchases. these can be a great deal, as long as you can pay off the bill before the end of the grace period. in my case, i actually do have the cash to pay for the item outright immediately, but it would just be more convenient to pay it off in the next 8 months (in this case the grace period is 18 months, so it’s not even close).

  14. Sue says:

    Trent, I am happy that I resisted to urge to open an “Old Navy” credit card this morning. Yahoo!

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