If you have ever stood at a register and been offered 20 percent off today's purchase in exchange for opening a store card, you have encountered one of retail's most effective sales tools. The discount is real. But the card often costs significantly more over time than what you saved at the register.
What store cards actually are
Most store credit cards are issued by a bank, not the retailer itself. The retailer partners with a card issuer to offer a branded product. The retailer earns a commission on each application and is motivated to get you to open the account. The card issuer takes on the credit risk and earns revenue through interest charges. The sign-up discount is essentially the cost of acquiring you as a customer.
The interest rates are higher than most cards
General purpose credit cards from major banks often carry APRs in the 20 to 28 percent range, which is already high. Store cards frequently run higher, sometimes into the low 30s or above, depending on your credit profile and the specific card. If you carry a balance for even a couple of months after using the sign-up discount, the interest can easily exceed what you saved.
Deferred interest is not the same as zero percent
Many store cards offer promotional financing advertised as no interest for 12 months or similar. This sounds like an interest-free loan, but many store card promotions use deferred interest rather than true zero percent. The difference is significant. With deferred interest, if you have not paid the full balance by the end of the promotional period, all the interest from the entire period is charged retroactively. Miss the deadline by even a few days and you are hit with the full amount.
When they might actually make sense
Store cards can work for people who pay their balances in full every month and spend regularly at a specific retailer. If you make large purchases at one store consistently, the ongoing discounts may genuinely outweigh any cost if you pay promptly. The issue is when they are used as general credit tools or when balances carry from month to month.
Run the numbers on the sign-up discount
A 20 percent discount on a $60 purchase saves $12. If that becomes a $60 balance at a 32 percent APR that you pay off over six months, the interest charges will approach or exceed that $12 saving. The math only works in your favor if you pay the balance off immediately or very close to it.
Store cards are designed to earn revenue through interest charges. The sign-up offer is structured to get you in the door. Going in with that understanding changes the calculation.