Have you ever been asked to apply for a store credit account at the cash register? You may regularly receive these offers, especially when you shop at stores that are part of a national chain.

What is a Retail Credit Account?

Long ago, retailers began extending credit informally to their customers as a convenience, but also as a way to finance purchases. This might be as simple as a bar tab that’s collected later, or a company that sells seeds to a farmer but only expects payment after the harvest.

Today, many retailers offer store credit accounts that can work in much the same way. Customers first apply for a store credit account, which often includes a physical charge card. In nearly all cases, these charge cards are offered in partnership with a bank, although only the retailer’s name may appear on the card. When used, these store charge cards work exactly like other credit cards, but they can only be used for purchases from the retailer that offers it.

Additionally, some stores may offer credit cards that are directly issued by the bank and co-branded with the retailer. These credit cards can be part of a larger payment network, and can be used for purchases at other merchants that accept credit cards in that network.

Benefits of a Retail Credit Account

Having a retail credit account has several advantages. First, you can earn rewards in the store’s loyalty program. In addition, cardholders may be sent coupons and invitations to special events. Having a retail credit account is also an easy way to track your spending at a particular store.

Why a Retail Credit Account Might Not Be for You

While there are several benefits to having a retail credit account, it does have some drawbacks. A retail credit account will often have a higher interest rate than other credit cards.

According to a report issued by CreditCards.com, the average APR on America’s largest retailer credit cards has risen to 23.84%, and nearly half of retail-branded cards carry an APR of at least 25%. In contrast, the Federal Reserve Board found that the average credit card’s interest rate across all accounts in 2016 was just 12.35% (13.56% for accounts assessed interest). Furthermore, many retail credit accounts are not part of a major payment network, which may limit the card’s use to in-store purchases only.

Finally, retail credit accounts and their credit cards essentially act as an advertisement that cardholders carry in their wallets. Some account holders may make purchases from the retailer rather than shop around elsewhere. If a significantly better price is available at a different store, the savings missed could easily outweigh any rewards earned.

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Bottom Line

Retail credit accounts are extremely common, but they are not for everyone. By understanding the advantages and drawbacks of this kind of credit, you can make the right decision the next time you are offered an application for a store credit account.

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