You have your Christmas shopping list made out and are ready to start buying gifts, but, you still have one more question to answer. Whether to use a traditional cash back credit card or a store credit card to pay for each item crossed off the shopping list. Both forms of plastic yield purchase rewards that can help you save money. But, if you can only choose one, what is the better option?
Cash Back Credit Cards
Advantages of Cash Back Credit Cards
Probably the most visible advantage of cash back credit cards is that they can be used at any establishment that accepts credit cards across the globe. Some merchants are more selective when it comes American Express and Discover cards, but, most major retailers will accept all four issuers. This means you can earn rewards for every credit card purchase, not just purchases made at one specific retailer.
While store credit cards offer larger discounts, a 1% or 1.5% (plus) cash back reward rate on every credit card purchase is often more valuable. Especially when people charge gasoline and groceries, two of the largest monthly household expenses, to their credit cards. If you plan to consistently carry high monthly balances, the reduced reward rate of a cash back credit card can keep your wallet thick.
Another benefit of cash back credit cards is that the best ones do not come with an annual fee, similar to store cards, and have higher credit limits than store credit cards too. As one commonly mentioned negative attribute of credit cards are annual fees of at least $45, no-fee credit cards allow users to start earning cash rewards from the first purchase each month. Plus, credit cards can boost your credit score when they are paid-in-full each month.
Disadvantages of Cash Back Credit Cards
One of the largest downsides of any unsecured credit card is that their credit limits are higher than store credit cards. The higher limit increases the temptation to spend more money and potentially incur credit card debt. As approximately 57% of consumers have carried an unpaid credit card balance in the United States within the past 12 months, this is a legitimate concern. Store credit cards can offer the temptation to overspend during the holidays as they can only be used at select stores and have noticeably lower credit limits than most cash back credit cards.
A second disadvantage of cash back credit cards is the low purchase rewards compared to store credit cards. Many cash back credit cards have a flat cash back rewards rate of 1% or 1.5%, although, a few pay 5% on rotating spending categories throughout the year. Store charge cards offer similar everyday purchase rewards of approximately 1% and also offer more frequent limited-time offers with higher bonus reward rates.
Store Credit Cards
Advantages of Store Credit Cards
Store credit cards are most valuable if you primarily shop at one store as they offer similar or more valuable purchase rewards as cash back credit cards and often offer bonus saving opportunities on a monthly basis.
If you plan on making a large purchase at a retail location, the cashier might ask if you want to save 30% on your first purchase when opening a store credit card today. Even the best cash back credit card sign-up bonuses have a hard time competing with these introductory offers. Of course, you will want to read the terms and conditions for the store credit card to make sure that Kitchen-Aid mixer or flat screen tv are eligible for the steep discount.
One final notable positive attribute of store credit cards is that they can also help establish a credit history and improve your credit score with timely payments. Store credit cards might not have the same universal functionality as cash back credit cards, but, they are treated as a revolving account just like credit cards.
Disadvantages of Store Credit Cards
The most glaring defect of store credit cards is that they only work on one specific merchant. For example, a Kohl’s charge card will not work at a Macy’s or any gas station for that matter. If you want to keep your wallet as plastic-free as possible, but, want a card that will work anywhere, cash back credit cards are the better option.
Store credit cards also have smaller credit limits and higher interest rates than cash back credit cards. While there might be less temptation to go on a spending spree with a store credit card, the balance still needs to be paid in full and on-time each month, like a credit card, to avoid incurring interest charges and late fees. The higher interest rates can result in bigger interest charges for those that carry a similar unpaid balance on either card.
Which is Better?
There are plenty of great cash back and store credit cards available to choose from. A store credit card might be a better option if you are afraid of going into credit card debt but still want to establish a credit history. As store credit cards can only work at one retailer, you have the potential to earn better comparative purchase rewards, a good sign-up bonus, and can still use cash or debit for all other purchases.
But, for most people, having a traditional cash back credit card is the best option. Earning a 1% reward rate on all purchases is better than all the monthly bonus offers from store credit cards as a household can only spend so much money at one retailer each month. Also, as online shopping becomes more popular each year, consumers are more likely to shop at the retailer that offers the best deal.
In many cases, the cheapest price might not be a traditional brick and mortar merchant that also offers store credit card, even if they offer free shipping for all online purchases. Cash back credit cards offer shoppers the most payment flexibility, which can come in handy when shopping for holiday gifts, food, and travel.
Author: Jeff Gitlen
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