Credit cards play a major role in how Americans spend money. According to statistics, around 174 million American adults have at least one credit card. Some people may even have two or three.
Why such a large number of credit cards?
Well, credit cards are useful as they allow you to borrow money and easily purchase goods online.
There are two types of credit cards that you can use. These are store credit cards and regular credit cards. Both have their pros and cons which can ultimately help determine which one is best for you and your needs.
Read on to discover the difference between these two types of cards and what benefits they can give you.
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What are Store Credit Cards?
Also known as private-label cards, store credit cards are issued on behalf of a retail store or a group of retail stores and can only be used to purchase goods from said store or stores. Private-label cards function just like a regular credit card does.
Some stores offer several different looking payment cards. These include regular and store credit cards, as well as gift credit cards. However, they have very big differences between them, so it’s important to know what they are before choosing one.
Pros of Store Credit Cards
1. Sign Up Discount
When you first decide to sign up for a store credit card, you’ll find that you often receive a discount on any items you are buying. Thus, depending on how much you buy, you may end up saving a large amount of money just by signing up.
2. Get Other Discounts
A store card is a great payment option as it offers you discounts that other cards may not, apart from the regular sign up discount. For example, if you buy a $2,000 TV entertainment system, you may be offered a 15% discount. This means you would save around $300.
3. No Annual Fee
One of the best parts of store credit cards is that they offer ongoing rewards without charging an annual fee. This is considered a top feature when most people sign up for credit cards.
In fact, according to statistics, people find that no annual fees are three times more important to them compared to a card with rewards and 50% more important than a card offering high security and fraud protection.
4. Easy to Obtain
Store credit cards are easy to qualify for. This makes them the perfect option for people looking to rebuild their credit or for first-time credit card users. You only need fair credit to be approved for one.
Cons of Store Credit Cards
1. Limited Usability
Unless they are co-branded, you can only use store credit cards at one specific store or group of stores. The only exception to this is store credit cards that are co-branded with a MasterCard, Visa or American Express logo.
Most stores offer co-branded credit cards too, to deal with the limited usability problem.
2. Higher Interest Rates
Unlike regular credit cards, store-based credit cards tend to have higher interest rates. Retail store cards usually have an average APR of around 23% while general purpose credit cards have an average rate of around 16%.
Higher interest rates mean that when you carry a balance, you’ll end up paying more interest. It will also take you longer to pay off your balance than if you had a credit card with lower interest rates.
But this problem doesn’t heavily affect all store credit cards.
Co-branded store credit cards usually have lower interest rates than others types of cards.
3. Reward Restrictions
Rewards are often difficult to earn with store credit cards and they have limited options for redemption. You can only get rewards on purchases you make in that store as you can’t use the credit card anywhere else.
Once you do end up getting enough reward points for redemption, you can only use it in store and sometimes you have to use your credit card just to redeem the reward.
4. No Free Interest Period
Store credit cards do not have a 0% interest-free period. Instead what you may find is that you receive a deferred interest promotion. This means you must pay the balance before the promotion period ends to avoid being charged interest.
Otherwise, if any balance does remain, you’ll get hit with backdated interest for the entirety of the promotional period.
5. Low Credit Limits
Another problem with these types of credit cards is they usually have low credit limits. It’s not unusual for cardholders to be approved for a $300 initial credit limit when they decide to get a store credit card. A credit limit that low is easy to max out, especially if it is for a favorite store.
What is a Regular Credit Card?
A regular credit card allows you to borrow money in little amounts at local stores. The card is used to make basic transactions.
You are then charged interest on your purchases by the credit card company you got the card from. Generally, there is a grace period of around thirty days before interest is charged, if you don’t carry your balance over from month to month.
Credit cards have high interest rates and can be used again after you pay it down. Your credit card payment history and balance can affect your credit score.
Pros of Regular Credit Cards
1. Can Be Used Practically Anywhere
General purpose credit cards can be used at any merchant that accepts credit cards. You typically won’t run into any problems using a MasterCard or Visa credit card. However, you may have issues with other cards like American Express, so it’s important to keep that in mind.
2. Earn Better Rewards
Credit cards reward you with cash back. These often come in the form of a statement credit or a check. It may also include points which can be used towards merchandise or miles to offset travel expenses.
3. Get a Good Credit Score
A regular credit card, compared to a store credit card, ultimately looks better for your credit. This may be due to the higher limits involved with it. If you want to reach a good credit score, you need to invest in a major credit card.
If you pay with a credit card, you get more protection than if you pay with cash or a debit card.
For example, if you buy something between a certain amount, you should get your money back if the transaction goes wrong. This includes if your purchase was faulty or didn’t turn up. You can most likely claim your money back from your credit card provider.
You also get protection if your card is used fraudulently as your provider should refund back the money. However, if you were negligent, your card provider won’t be able to help you out.
5. Borrow for Free
Many credit cards offer 0% periods which mean you can effectively benefit from an interest-free loan. However, you need to make the minimum monthly payments. This clears your balance before the 0% offer ends, otherwise, you will be charged interest.
The average interest rate is around 18%. It’s pretty hefty, so it is important that you pay off your debt before the interest kicks in.
Not everyone needs an extended interest-free period, but even if you do pay your credit card bill fully, you will still borrow for free. As long as you pay off your bill by the due date, you won’t be charged interest. This is great when it comes to managing your cash flow.
Cons of Regular Credit Cards
1. Possible to Get Trapped in Debt
At the end of the day, it’s vital to remember that credit cards are still a form of borrowing. You buy your stuff now and pay later, so there are always risks attached to it.
If you don’t pay off your balance fully each month, you will end up gaining interest. Your debt can then quickly spiral out of control, especially if you only pay off the minimum monthly amount.
2. Hidden Costs
There is more to the cost of a credit card than just interest rates. A fee will be charged if you are late in making a monthly payment or if you miss it altogether. You will also pay a penalty if you exceed your credit limit. Thus, be sure you keep track of your spending and pay it on time.
Store Credit Cards and Regular Credit Cards Have a Range of Benefits and Issues to Consider
Before you obtain a credit card, you need to decide what you want to use it for. Will it be for everyday use or are you using it for a one-off purchase? If you do want to get a credit card, you need to ensure you request one from the professionals.