How do store credit cards work?

Store credit cards work like regular consumer credit cards, in that you make purchases on the card, and you make payments on your purchases, either in full, or over time. The difference is, with a store credit card, you’re limited to purchases within the store or the store website.

The exception is a store card co-branded with a network such as Visa or Mastercard. You’ll still be eligible for any in-store discounts when you use the card, plus you’ll have the flexibility of using the card anywhere the card’s network is accepted.

Store credit cards come with advantages, and some pitfalls. You’ll have to assess how frequent you shop at the store, along with your spending habits and current credit profile before you apply.

Here are some store credit card advantages:

• Easy approval: Store cards typically require at least fair credit, making it easy to qualify. Co-branded store credit cards might be harder to get because of its added spending power. Expect most co-branded store cards to start out with a minimum of good credit.
• Builds and establishes credit: A store credit card is just that, a credit card. Any activity on the card should be reported to the major credit bureaus. Just be careful not to overspend at your favorite store, or you may end up damaging the very credit you’re trying to establish.
• Rewards and benefits: You can receive generous discounts on in-store purchases just by applying in the check-out line. You’ll also receive offers for other perks and benefits such as free shipping, no-hassle returns and exchanges, online discounts, and more, all when you use your card. Co-branded store cards get to cash in all the store perks, and may also earn rewards on purchases made outside of the store.

Here are some store credit card disadvantages:

• The debt trap: Your favorite store credit card is not an invitation to overspend. Be careful with “exclusive” sales events. Your intent might be to save a few bucks on sale items, but oftentimes, the tendency is to spend more, thinking the savings will offset the cost of the additional purchases. The reality is you’ll likely end up with more debt than you’d originally planned.
• Low credit limits: Don’t expect to have much spending power with a store credit card, especially if this is your first credit account. With a couple of quick purchases, you’ll easily end up burning up most of your available credit. That will push your utilization, or debt-to-credit ratio, to an unfavorable level. Try to  maintain a ratio of less than 30%. The higher your utilization, the less likely you’ll be eligible for credit limit increases or additional credit accounts.
• High interest rates: Store credit cards often charge significantly higher interest rates than regular credit cards. The average regular APR for store credit cards topped 28% in 2017, according to the WalletHub Store Card Landscape report. If you carry a balance or are overextended on your store credit card, the debt will mount quickly. Interest is calculated daily and starts accruing on the transaction. That interest is compounded, which means if you carry a balance, another wave of interest charges will pile on top of the interest accrued during the previous month.

Beware of any 0% financing promotions a store may offer when you make a large purchase on your store credit card. Hidden in that offer is something known as deferred interest, and it’s standard practice on most store credit cards. You charge a specific amount on your store credit card, and you’ll receive 0% interest if you pay off the balance in full in a specified number of months.

The problem is, you’re not really getting 0% interest in the traditional sense. That interest is “deferred,” meaning the only way you’ll get the 0% rate is if you pay the balance in full before the end of the promotion. Otherwise, even if leave a $1 balance when the promotion expires, all that interest you thought you were saving, interest charged to the original purchase amount, will be added to any unpaid balance.