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When you’re shopping online or in your favorite retail store, it can be tempting to accept the offer to save an extra 10% by opening a store credit card. It’s quick and easy to complete the credit card application right there and save money on your purchase. However, store credit cards can end up costing you more in the long run, so it’s important to weigh the risks and rewards before accepting any offers of in-store credit cards.
An important distinction to make is whether or not the store-issued card is considered “closed loop” or “open loop”. Closed-loop cards are those which can only be used at the store where it is issued, or a group of stores under that retailer’s umbrella. You may also see these referred to as “single purpose” cards. Open-loop cards are credit cards that are issued by a store but part of a payment network such as Visa, Mastercard, Discover or American Express. These cards can be used wherever these payment networks are accepted.
Limited use. Many store-issued credit cards are “closed loop” and can only be used in the store that issued the card. Plus, you typically have fewer options for redeeming rewards. Any perks you earn will likely be tied to making additional purchases in-store or online. By comparison, other credit cards allow you to earn points anywhere you shop while providing more versatility to redeem rewards for cash back, travel or other options.
High interest rates. You might receive an introductory offer for 0% financing for 6 months or more with a store credit card – but watch out for the rate that kicks in after the introductory period. Store credit cards generally have higher interest rates compared to other credit cards. The average annual percentage rate for store credit cards is 24%, according to The Balance’s credit card rate survey. If you carry a balance on a store card, the interest payments may add up a lot faster than any benefits you receive from the card.
More cards to manage. If you’re in the habit of signing up for store credit cards, you may quickly end up with a stack of cards in your wallet. This can be a lot to manage, and it’s easy to miss a payment when you have to keep track of multiple accounts.
Credit score implications. Having a store credit card with a low credit limit may actually hurt your credit score, especially if you carry a balance on the card. Your credit score is based, in part, on how much available credit you have on each of your credit cards. If you’ve charged $400 on a store credit card with a $500 limit, this shows up on your credit report as high credit utilization. Your credit utilization looks a lot better if you’ve charged $400 on a credit card with a $4,000 limit.
Having just one or two credit cards allows you to build a good credit rating without paying the high interest rates that are common with store credit cards. If you carry a credit card balance on a high-rate card, you could save money in interest with a balance transfer to a low-rate card. Learn more about DCU Visa® Platinum credit cards with great rates and no balance transfer fees.
Please note, membership is required to open a DCU Visa® credit card. Visit our membership eligibility page for more information.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional