Department Store Credit Cards Explained

Most major retailers today offer department store credit cards. These credit cards may be operated through accounts with major banks and processing companies, and they carry many similarities to standard credit cards. There are some differences to note, though, that make these accounts less attractive in certain circumstances.

Revolving Credit Cards

Most personal credit cards and department store credit cards are extended on a revolving basis. This sounds confusing, but many borrowers are actually similar with the revolving process. This means the issuer, whether it is a bank or department store, provides you with a limit you can spend at any given time. The limit is cumulative, and you can continue to spend until the limit has been reached. At any point, you can pay down a portion of the balance. If you do not pay down the balance in a cycle, your balance revolves, and this means the company charges interest on the sum. Revolving credit lines offer a lot of flexibility to the borrower. However, they can become expensive if balances revolve often.

Non-Revolving Charge Cards

Some personal cards and some department store cards are extended as charge cards. These credit lines are only slightly different, but the difference makes a big impact. With a charge card, the balance cannot revolve across months or payment cycles. The balance is due in full at the end of each payment cycle. Many department store cards are actually charge cards, and this causes confusion for individuals not used to the concept. If you fail to pay the entire balance on a charge card at the time it is due, you will be assess fines and penalties in addition to receiving a negative credit report. 

Department Store Interest Rates

Even if a department store card is a traditional revolving credit line, it may still be more expensive than a personal credit card. In most cases, the interest rates are higher. However, these rates can be disguised. Many department stores offer 0% financing for a short period of time. Buyers are talked into spreading out their payments over time instead of paying all at once for no additional penalty. Then, when the 0% interest period is up, the rates may skyrocket. This practice is not used on all department store cards, but it is one common tactic department stores use to earn money off of unsuspecting customers. If you use a department store card, it is best to pay down the balance quickly.

Opening Too Many Cards

One other concern with department store credit cards is the impact they have on your credit score. Having multiple credit lines is healthy. Unfortunately, having too many credit lines can lead to a credit score drop. This happens because lenders fear the possibility you may very quickly go deeply into debt by simply maxing out all of your credit cards. If this were to happen, you could have a very sudden debt crisis compromising your ability to repay other loans. Too many open credit cards will ultimately lower your score, so you should only open cards at a few retailers offering great benefits.

How do department stores make money on credit cards?

Department store credit cards use interest to generate income for the store itself. The store may have an agreement with a traditional financing company to issue branded cards, or the store may run its own finance division. In any case, the store will charge interest on the balance on your card each time the balance revolves. Typically, department store credit cards offer you incentives for shopping at the store, such as special sales and discounts. However, the interest rates are often higher than those on traditional credit cards. For this reason, it makes sense to use a store card only if the benefits outweigh the extra interest.

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