Should You Sign Up for Store-Branded Credit Cards?

Store-branded credit cards come with tempting offers like reward points and exclusive access to coupons and sales events. With the high-spending holiday season closing in, shoppers no doubt are looking for any opportunity to keep money in their pockets while checking off items on their wish lists. The savings certainly add up, but is there real value in signing up?

If spending less on purchases is the end game, then the answer is a resounding "yes." If the purpose is related to your credit standing, then the answer is "maybe."

Credit cards issued by Target and Lowe's, for example, offer 5 percent off in-store and online purchases. House credit cards often come with assorted money-saving bonuses, as well, from an initial discount when opening an account and additional special deals to greater rewards after reaching a spending threshold and financing options on big-ticket items.

Some stores offer two types of branded credit cards: One to use exclusively at the associated store (and possibly a few other retailers that belong to the same corporate family) and another with a Visa, MasterCard, American Express, or Discover symbol that can be used almost anywhere. (The latter are more practical and may generate even more benefits than the store-only card.) Among the vendors we researched, Walmart, Toys R Us, Best Buy, Sears, Macy's and Gap offer consumers a choice. The chart below details the perks attached to popular store-branded credit cards and, for the above six companies, lists the benefits attached to the card accepted outside the issuer's universe.

Consumers who are trying to repair or initially build credit may find store-only credit cards the path to pursue. Michael Dolen, who writes the blog Credit Card Forum, says one realm in which the store-only cards shine is the relative ease with which applicants get approved. But be sure to use the card responsibly, otherwise you risk falling short of your goal.

Affect on Your Credit Score.

Any and every new credit card affects your credit score. Attempts to open a credit account trigger what is known as a "hard inquiry" (i.e., a close look by a prospective lender) into your credit history, which on its own prompts a small zero- to five-point drop in your credit score. That's generally not a problem but there may be a greater decrease if many hard inquiries are initiated in a short period of time. (Read more about the consequences at My Fico.)

If you obtain a store-branded credit card simply to benefit from the initial discount, don't cancel it afterwards -- doing so negatively affects your credit score in two ways. Because 15 percent of your credit score depends on the length of your credit history, closing an account disrupts the process of building that history and likely shortens the average age (duration) of the accounts. Additionally, 30 percent of your score reflects the amount of money you owe. Ideally you should use only 10 to 30 percent of the total credit available to you. Closing an account means less credit associated with your name, so the percentage of credit in use -- known as the utilization rate -- rises.

The takeaway: Keeping a store-branded credit card account open and using it occasionally to ensure it won't be closed for inactivity can help boost your credit score.

What to Watch Out For.

Store-branded credit cards generally charge very high interest rates. No card on our chart starts with an APR less than 17.99 percent and many are closer to 25 percent. Many cards are tied to rewards programs that are incentives to spend, and when coupled with high interest rates on outstanding debt, they are magnets for danger. It's all too easy to dig yourself into a consumption hole that's hard to crawl out of.

Which Cards to Get.

If you're eager to earn cash back on credit card purchases during the holidays, bypass the lure of store-branded cards. The absence of perks beyond those attached to the specific store and the limited benefits of even the cards affiliated with the major credit card companies can be a buzz-kill.

Consider, instead, one of the better general-purpose rewards cards. Chase's Freedom card, for example, features a zero percent APR for 15 months and thereafter starts as low as 13.99 percent, depending on your credit score. It also provides a 5 percent rebate up to $1,500 worth of purchases from rotating categories. During the holiday shopping season this year cardholders qualify for money back on purchases at Amazon and more than 45 department stores, including J.C. Penney, Kohl's, Macy's, Nordstrom, and Sears (but not Target, Walmart, or electronics stores).