Department-store credit cards have their perks. Many have fantastic rewards programs and excellent financing offers. However, department-store cards tend to have sky-high interest rates, and deferred-interest financing can be dangerous. Before you apply for a credit card at your favorite department store, here's a rundown of the pros and cons.
Many department-store credit cards are issued in partnership with one of the major payment processors (Visa, MasterCard, American Express, Discover) and can be used anywhere. These are known as co-branded credit cards. On the other hand, some are only usable in the store itself. These are also known as private-label credit cards.
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The main reasons to consider a department store's credit card
There are two main advantages that often apply to store credit cards.
The first is rewards. Department-store credit cards often issue rewards on purchases in the store at reward rates that are simply better than anything a traditional credit card offers. For example, one of my department-store credit cards offers 6% back in rewards on every purchase in the store or on its website and regularly has 10% rewards "bonus" offers.
The second main advantage with department-store credit cards is the deferred-interest offers, especially when making large purchases. The same store credit card I just referred to offers deferred interest offers as long as 60 months on large purchases. In other words, if you pay the purchase off in full within the 0% APR period, you'll pay no interest at all. Deferred interest deals have their drawbacks, which I'll discuss in a moment, but when used properly, they can be a major perk.
A high interest rate can be a big drawback
While there are exceptions, department-store credit cards tend to have higher ongoing interest rates than other credit card products. As a personal example, I have two department-store credit card accounts, one of which is a Visa card and one of which is strictly a store credit card. As of this writing, both have interest rates of 25.49%, far above the national average for credit cards, which is about 15%. Store credit cards with interest rates close to 30% are not uncommon.
The point is that even though department-store credit cards can have some of the most attractive rewards programs and financing offers on the market, if you're paying an extremely high interest rate on a carried balance, it can easily offset any value you're getting from the perks.
A problem with those "no interest" financing offers
Another caveat with department-store credit cards is that when you take advantage of a no-interest financing offer, you may need to pay the entire balance in full before the 0% APR period runs out, or else get hit with a massive deferred-interest charge.
With standard credit cards that offer 0% intro APRs, the interest doesn't start until the promotional period expires. For example, if you transfer a $5,000 credit card balance to a new card with a 0% intro APR for 12 billing cycles and only pay the balance down to $3,000 before the end of the introductory period, the interest will simply begin to accumulate on the remaining balance starting with the 13th billing cycle.
On the other hand, let's say a department-store credit card offers interest-free financing for 24 months on purchases over $999, as one of my cards is offering now. In this case, the interest starts to accumulate from day one, but as long as you pay the entire balance off by the end of the introductory period, you won't have to pay it. If the 24-month period ends, and there is even one dollar remaining, you'll have to pay all of the interest that would have been assessed during the 24-month "interest-free" period, which could be hundreds of dollars.
This is known as deferred-interest financing, and I've had friends learn what it means the hard way.
The point is that if you take advantage of a department store card's offer of interest-free financing, be sure to find out if you're responsible for paying deferred interest at the end of the introductory period. If you are, be prepared to pay off the entire balance during the no-interest period, not just the minimum payments.
Alternatives to department-store credit cards
There are advantages and disadvantages to department-store credit cards, so they're not the right type of credit card for everyone.
Alternatively, if you plan to carry a balance on your card, you're probably better off with a lower-interest credit card. Or, a cash-back rewards card could allow you to earn rewards (and redeem them) wherever you want, not just at one specific store.
In addition, if you want to finance a large purchase but aren't sure you'll be able to pay it off in full during a deferred-interest period, a card with a good 0% intro APR offer could be the way to go. Some of these cards also have generous introductory bonuses and rewards as well.
So, are department-store credit cards worth it?
Generally speaking, if you're going to carry a balance (aside from during a deferred-interest period), it's really not worth getting a department-store credit card. These cards tend to have interest rates that simply aren't competitive with standard credit card products.
However, if you shop at a certain store frequently and its credit card offers a great rewards program, and you don't carry a balance, or you want to take advantage of a deferred-interest offer, and know you'll pay the balance off within the promotional period, a department-store credit card could be a smart idea.
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Matthew Frankel owns shares of American Express. The Motley Fool owns shares of and recommends Mastercard and Visa. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.