If you’ve ever visited a department store, you’ve probably seen how they use credit card promotions to rope you in. The first clue you’re being scouted usually takes place at the register. As you check out and prepare to pay, the cashier hints that you could save 20% or 30% on today’s purchase, but there’s a catch. To score this amazing discount, you need to sign up for a store credit card.
Store credit cards work similarly to traditional credit cards in that they let you charge purchases and pay them back over time. The biggest difference is, you can often only use your store card at one department store or a family of stores. (See also: Store Credit Cards That Don’t Suck)
While nothing is technically wrong with store credit cards — and they can absolutely help you score killer deals on in-store merchandise — that doesn’t mean they’re risk free. There are several features of store cards that set them apart from most other credit cards, and that can turn into pitfalls if you’re not careful.
Before you excitedly rush into applying for a store card to get the promotional deal, here are some downsides to be aware of.
1. High interest rates
One of the biggest pitfalls of store credit cards is the fact that they tend to charge higher interest rates than regular credit cards. Sure, cardholders may get coupons for 20% or 30% off purchases, but you’ll pay heavily for those discounts if you dare to carry a balance.
One popular clothing retailer advertises 30% off your first purchase and 12 extra discounts per year if you sign up as a cardholder, but the fine print reveals that the card’s ongoing APR is 24.99%. If you ever plan to carry a balance, you’d be better off forgoing the store card and discounts and signing up for a low interest credit card instead.
2. Limited acceptance
Another big downside of store credit cards is the fact that most, but not all, can only be used at select stores. These are called “closed-loop” since you can only use them at that particular merchant.
Still, some retail cards are also co-branded with Visa or MasterCard. This makes them useful if you need credit for an emergency purchase like a car repair. If you plan to get a credit card to score discounts or rewards, but also think you might use it for emergencies, look for a co-branded card. Some retailers offer both co-branded and closed-loop cards.
3. Narrow rewards redemptions options
Some store credit cards offer their own rewards programs, but these programs are typically limited in scope. For example, one department store card lets you earn 3-6 points per $1 spent at that store, depending on your purchase. But you have to spend 5,000 points to get a $25 gift card. That means you might have to make around $1,667 in purchases to get a $25 reward.
That is a rate of return of around 1.5 points per $1 spent (or 1.5%), but your reward is only good for gift cards at that store, making its value severely limited. On the flip side, you could easily find a cash-back credit card that offers 2% cash back or more. With that strategy, you could use your rewards however you want.
4. Deferred interest
Deferred interest is another gimmick department stores use to rope consumers into signing up for a store credit card. These offers are usually advertised similarly to zero interest credit card offers, but they’re not the same thing. According to the Consumer Financial Protection Bureau (CFPB), the biggest telltale sign of a deferred interest offer is that the term “if” is used. (See also: Deferred Interest Credit Cards: Don’t Fall For This Trick Over The Holidays)
For example, a 0% offer on a credit card may say something like, “0% APR on purchases for 12 months,” whereas a deferred interest offer will say, “No interest if paid in full within 12 months.”
That “if” makes a big difference because, if you don’t pay your balance in full as the offer specifies, you’ll be hit with retroactive interest charges.
“Deferred interest means that if you do not pay off the entire balance of the promotional purchase you’ve made on your card, then interest going back to the date of the purchase will be added on top of the remaining balance,” writes the CFPB. “This promotion may also require you to meet other terms as well, such as making your minimum monthly payments on time.”
Here’s how deferred interest works: Imagine you financed $400 in holiday shopping purchases on a store credit card that offered no interest if you paid your balance in full within 12 months. However, the card’s interest rate is normally 25%.
Your purchases would accrue $100 in interest charges during the first 12 months, even if they weren’t charged right away. If, after 12 months, you hadn’t paid down the entire $400 balance, you would immediately see $100 in interest charges added to your bill.
5. Store closures
Store closures are yet another pitfall to watch out for with store credit cards, and this issue really seems to be coming to a head. Major retail chains have closed as many as 5,000 stores in 2017.
If you have a store credit card for a department store that closes, it’s not the end of the world. Nothing will happen to your card other than the fact you’ll no longer be able to use it. Obviously, you’ll still owe your balance plus any interest charges. The worst part, however, is the fact that any rewards you’ve accrued will be worthless once the store is gone.
In that respect, a traditional cash-back rewards card could leave you a lot better off since these cards aren’t tied to a particular store. Before you sign up for a store credit card, make sure to consider the fact that the store you patronize now may not be around forever.