Avoid Store-Branded Debit Cards

Point of Interest: Store-Branded Debit Cards

A few American retailers offer branded debit cards with rewards like cash back, but the risk of overdraft fees and the lack of consumer protection make them a poor substitute for rewards credit cards.

During checkout or while shopping online, you’ve surely been bombarded with credit and debit card offers promising big rewards, instant savings and other store-specific perks. While credit cards are the normal offerings, some stores, like the department store Nordstrom, have its own debit card available. Although the savings and perks may seem attractive, pump the brakes on the instant gratification to understand what you’re signing up for.

What is a store-branded card?

Years ago, stores realized they could improve profits and bottom lines by offering debit and credit cards to existing shoppers. Stores entice customers to sign up for these programs by offering perks like discounts on purchases, cashback, access to exclusive products, early store entry, closed sales and even tiered member status.

While the card is branded with the company’s logo and information, it’s typically operated by a third-party bank or creditor. For example, the Nordstrom debit card may seem like it’s owned and operated by Nordstrom, but in fact, it’s owned and operated by TD Bank USA. Nordstrom is only a third-party affiliate for the bank, operating as a middleman in the sign-up process.

Why do stores do this? Not only do stores get a kickback for getting you to sign up, but the store-specific perks can entice customers to buy and shop more often. These cards bring in extensive revenue and repeat business for the retailer.

How a store-branded card works

When you apply for a store-branded debit or credit card, you’re usually instantly rewarded with some benefit or savings, typically a percentage off your purchase. As you’ll usually receive this reward regardless of approval, it might be tempting to fill out the application and reap the rewards. The problem, though, is this usually results in a hard pull on your credit. A few of these are fine, but multiple applications at multiple stores result in too many hard pulls and can have a negative impact on your credit score. Additionally, too many open accounts can be a red flag to creditors and could impact your ability to make larger purchases in the future. No one wants to be rejected for a car or home loan because they wanted to save a few bucks at Nordstrom or Target.

If you are accepted into the program, you’ll usually receive your new card and information within 5 to 10 business days from the providing company. Be aware that the same rules, regulations and requirements that come with a traditional debit or credit card will apply here as well. For example, the Nordstrom debit card assesses $25 returned payment fees, leaves you open to potential fees during purchases, and even has the ability in some states to garnish your wages for lack of payment.

Things to consider about store-branded cards

When considering a store-branded credit or debit card, it’s important to realize the cards are no different than the credit or debit cards offered by banks and credit unions. There’s a tendency to view store cards in a separate category and ignore the concerns and considerations we place on cards that come from more traditional sources. Additionally, access to too much credit can entice some with less self-control to make more purchases than they ideally should.

If you were not interested in getting a new credit or debit card before you went into the store, chances are you shouldn’t be getting one just to save a few bucks on a purchase. There are some instances where there might be exceptions, but for the most part, be aware of the gimmick to get you on board.

If you do decide you’re interested in acquiring a store credit or debit card, give it the same considerations you would with a traditional card. This means look at the dividend rates on account funds for debit cards and the interest rates on balances for credit cards, the benefits on purchases made at other stores and how it compares to other available options.

When to use store-branded cards

While there are many cons to store-branded cards, there are some unique situations where you might want to take advantage of an offer. If you’re making a massive purchase and will save a large percentage instantly, it may be in your best interest to utilize a store-branded card. Keep in mind, though, that doing this too many times this could have an impact on your credit that would be more expensive than any of the savings you receive on that individual purchase.

Second, those that spend extensive amounts of money regularly and plan to do so for the foreseeable future at the same store should weigh the pros and cons of a store-branded card. If you do decide to open an account, make sure you utilize it every time you shop there. Additionally, look for opportunities to shift purchases from other locations to that store if the benefits work in your favor.

Ultimately, whether you should use a store-branded card or not will heavily depend on your financial situation, your unique shopping habits and the benefits and drawbacks of each card. In most cases, you can get much better long-term benefits from a rewards credit card or account that works anywhere you spend money.

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