How do retail store credit cards differ from general credit cards?

How do retail store credit cards differ from general credit cards?

Credit cards are a popular method for making purchases, managing money, and building credit scores. However, there are important differences between general credit cards and retail store cards that consumers should understand before applying. Retail store cards are specifically tied to individual retailers instead of bank issuers. While they can offer discounts and rewards at that store, they generally have higher interest rates and fewer consumer protections compared to general cards. 

Interest Rates

One of the most significant differences between retail store cards and general credit cards is the interest rates charged on balances. Generally, retail store cards have much higher annual percentage rates (APRs) than standard bank-issued credit cards. The average APR for general credit cards is currently around 16-24% depending on credit history, while retail store cards often charge 25% or more in interest. Some discount the initial interest rate for a limited time as a promotional offer, but rates typically jump up after the introductory period ends.

High interest rates on retail store cards can result in cardholders paying much more over time if balances are revolving from month to month without being paid off in full. For example, let’s say someone charges $1,000 to a store card at 29.99% APR and only makes the minimum monthly payments of $30. It would take them over 13 years to pay off that balance and they would pay over $2,300 in total interest charges! That same $1,000 balance on a general credit card at a more modest 22.99% APR would still be paid off in under seven years with $830 in interest.

The higher rates on store cards benefit the retailer, not the consumer. People are more likely to continue carrying balances and paying interest, generating ongoing revenue. But it should be a red flag for anyone focused on minimizing long-term costs. Only open a retail store card if you’re confident you can pay statements in full each month to avoid pricey interest charges.

Rewards & Perks

While the drawbacks of retail store card interest rates are significant, they do sometimes offer better rewards when used within that store. Many provide cashback rewards of 5-25% on purchases that can be used as statement credits. Some may offer special financing promotions like no interest for 6-24 months on certain items over a minimum spend.

However, the rewards tend to be limited just to that one retailer. A general rewards credit card earns points or cashback that can be redeemed with flexibility at merchants of your choice. They also often have signup bonuses worth hundreds of dollars for meeting a spending threshold in the first few months.

The rewards on store cards are also not as valuable as general cards once balances start accruing interest, negating any rewards earned. It’s best to approach store cards as a tool for maximizing savings within that retailer only, and not a long-term credit vehicle unless you reliably pay statements in full each period without exception.

Protection & Customer Service

General credit cards typically offer stronger fraud protection policies and customer service than retail store cards. Federal laws like the CARD Act provide requirements around billing disputes, reporting errors, and limiting Liability for fraudulent charges. These protections are administered by federal regulators and the card networks.

In contrast, any disputes or issues with retail store cards would generally be handled directly by the individual retailer. Their policies may not be as extensive, response times could be slower, and there is no external regulatory body enforcing compliance with federal consumer laws. In the event of fraud, returns, or other account problems, a national bank is likely to have more robust processes than an individual store’s customer service department.

Furthermore, if the retailer goes out of business, there may be complications in resolving any lingering account issues or unpaid disputes. Store cards are tightly coupled to the continued success of that specific company, whereas general credit cards remain valid and protected even if once-preferred brands falter over time. Any financial or legal protections would come directly from the retailer rather than independent credit networks.

Credit Reporting & Scores

Both general credit cards and retail store cards can help build credit files and credit scores when managed responsibly. However, there are some differences in their reporting:

  • Store cards typically report activity to all three credit bureaus (Equifax, Experian, TransUnion) on a monthly basis like other credit products. This regular reporting of on-time payments helps demonstrate creditworthiness over time.
  • However, credit limits on store cards tend to be lower than those on general cards. High credit utilization, or balances that approach the limit, can negatively impact credit scores. Care must be taken not to over-utilize the lower limits of store cards versus other accounts.
  • Closed accounts may remain on credit reports for up to 10 years, still affecting credit age factors. This helps those who always paid as agreed. But it also continues to reflect any late or missed payments for the full 10-year period after closure.
  • Unlike general credit cards, most store cards do not increase credit limits over time based on payment history, as the issuer knows the customer is focused on that one store. This also limits the ability to minimize credit utilization percentages just through that one account.

So, in summary – store cards report positive payment history but with some caveats around lower limits and lack of potential limit increases. Manage credit utilization carefully across all accounts to maximize the long-term credit-building benefits of a retail card.

Application & Approval Odds

It’s generally easier to qualify for and be approved for a retail store credit card than a standard credit card issued by a bank. Store cards have looser underwriting criteria focused more on transacting with customers of their business. This means applicants with lower credit scores may still be accepted. However, the downside, as described, is higher interest rates and less flexible rewards once approved.

When applying for a store card, these factors can improve your chances:

  • Existing relationship with the store as a customer with a purchase history shows your commitment. Apply in person during checkout for maximum visibility.
  • Steady employment and income information on the application provides stability signals.
  • No recent bankruptcies, foreclosures, wage garnishments, or other negative items on your credit reports.
  • Credit scores above 600, though some issuers may approve in the mid-500s range or higher depending on other profile strengths.
  • Clean payment history is shown on other active credit accounts like energy bills, auto loans, or an existing general credit card.

Store cards are essentially pre-approved targeted offers for existing customers. Use the easier acceptance to build a positive credit-building account, then look to upgrade to a general card later once credit strengthening allows approval by more competitive issuers.

Restrictions on Use

A major limitation of retail store cards compared to standard credit cards is that the funds can only be used at that specific retailer and are not universally accepted like Visa or Mastercard. While rewards only apply within the store, this also means any credit line extended is effectively a “gift card” only redeemable for purchases from that company.

Emergencies might arise where credit is needed elsewhere, but store cards offer no flexibility in those situations. They also aren’t as useful when shopping online since the card details can’t be securely stored by websites for ease of future checkout. Orders have to be called in each time using just the card number or account PIN.

Store cards are best viewed as a supplemental account rather than a primary all-purpose credit option for these versatility reasons. Keep a general credit card as the go-to choice for payments and have the store card as an additional option for targeted in-store savings when possible.

Impact on Credit Mix

Credit scores considers not just payment histories but also the type and variety of credit accounts held. A diverse “credit mix” with different products reporting like credit cards, personal loans, retail accounts, and even cell phone bills demonstrates strengthened credit management abilities across multiple sources of credit responsibility.

While store cards help build credit files, over-reliance on just one or two types of retailer accounts limits this credit mix effect. It’s healthier long-term for scores to also have at least one general-purpose credit card that can be used universally and shows fiscal discipline with open credit lines across various industries/brands.

Adding a standard credit card to use alongside an existing store card maximizes both the payment updates benefit and positive credit variety reporting to help push scores higher over the years. Retail cards alone may put a visible cap on potential scores due to the constraints around portfolio diversification.

Closing a Retail Card

Closing a retail store credit card requires the same caution as any other account closure:

  • Like general cards, store cards remain visible on credit files and continue reporting activity for up to 10 years even after closure. This preserves credit history length benefits over time.
  • However, it also maintains any negative items that were reported during that period, like late payments, if those occurred before closing.
  • Closing removes available credit, increasing credit utilization on open accounts and potentially impacting scores in the short term.
  • Applying for a new credit line soon after closure may result in multiple new account inquiries and also briefly lower scores.

For these reasons, only close a retail card account if absolutely necessary due to issues like too high-interest rates or annual/inactivity fees charged. Keep the account open but inactive if possible to maintain credit age factors. Don’t close a store card solely to open a replacement credit line, as that results in a short-term hit from multiple inquiries and reduced available credit. Over time, the store card will continue reporting unused but positive data to strengthen aging credit metrics.

FAQ Section

Can Store Cards Help Build Credit for Those with Limited/No History?

For consumers just starting to establish credit or those looking to rebuild after past issues, retail store cards can be good initial options to build positive payment behaviors into credit files over 6-12 months. Their easier approval standards compared to standard banks provide a first step. However, interest charges should still be avoided by paying in full each month. After responsibly managing a store card for 1+ years, the individual will be a stronger candidate for applying and being approved for additional mainstream credit cards offering better terms.

When Should Someone Apply for a General Credit Card Instead?

Most experts recommend applying for a standard credit card once the individual has at least one retail card reporting 12 on-time minimum payments or after being an authorized cardholder on a family member’s credit card with a solid payment history. Credit scores in the mid-600s are commonly competitive for general card approvals from many issuers offering rewards programs. At this point, a consumer demonstrates capable credit management and readiness to be trusted with open-ended trade lines providing balance flexibility each billing cycle.

How Long Should Someone Keep a Store Card Open?

As long as the account is managed responsibly with on-time payments, keeping the retail card open can continue positively benefitting the credit profile for years into the future by providing additional credit history aging factors. Unless annual or usage fees are excessive, it’s best to keep the store card actively charging a small recurring trusted amount each month, like a subscription, to maintain the account’s positive compliance. Inquiries and decreased credit from closing become non-factors over the long run compared to maintaining continuous on-time payment updates reporting to bureaus.

Is There Ever a Good Reason to Open Multiple Store Cards?

While each additional card extends available credit and incrementally strengthens the credit mix factor, there are some drawbacks to consider around repeated applications, including multiple hard inquiries and too much available credit concentrated in retailer trade lines versus diversified accounts. A maximum of one to two store cards is generally recommended. Only open additional retail cards if necessary to access desirable recurring rewards or exclusive promotions not otherwise available on existing cards. Otherwise, it’s better to shift focus toward broader bank-issued credit options once approved for standard credit cards by national issuers.

How Can Store Cards Hurt Credit in the Long Run?

The biggest ways store cards can damage credit long term revolve around carrying debt month after month by paying only minimums and allowing interest charges to pile up. High utilization of lower credit limits also undermines scores. Late payments obviously worsen files significantly, as does defaulting on an account. Beyond active account issues, focusing solely on retailer credit means missing out on stronger credit lines from banks and rewards programs with flexibility and protection under consumer laws – all of which have facilitated safer credit management over the decades as purchasing needs change.

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