Explaining the Term "Private Label" Credit Card

Explaining the Term

Definition

One form of credit card is known as a “private label credit card,” and it is one that may only be used at a certain store or brand.

 The Meaning of Private Label Credit Cards, Along with Some Examples

A sort of branded credit card known as a “private label credit card” is one that can only be used with a particular retailer or brand of goods and services. Credit lines on revolving accounts are offered to cardholders by banks in partnership with various retailers and brands. 

The shop is in charge of promoting the cards and persuading customers to apply for credit cards, while the bank is responsible for providing the funding for the transactions. Some companies that give out private label credit cards are Citi, Synchrony, and Comenity Bank, among others.

To increase sales and ensure continued client loyalty, several stores now offer their own branded credit cards. Some of the store’s private-label credit cards can be used to earn credits that can be redeemed for future discounts on purchases. This benefit is available to cardholders who participate in the store’s customer loyalty program.

The following are some examples of private-branded credit cards:

  • Amazon gift card
  • credit card issued by Best Buy.
  • Target RedCard
  • Other names for this type of credit card are closed-loop credit card, retail credit card, and store credit card.

How the Operation of Private Label Credit Cards Takes Place

Retailers or brands may form a partnership with a financial institution to provide clients with credit cards that feature in-store shopping incentives. The bank is responsible for vetting potential new cardholders, providing funding for transactions, and processing payments made by existing cards. The retailer, on the other hand, is in charge of marketing the product and getting new customers to sign up in-store and online.

Transactions made with private-label credit cards result in a split of earnings between the bank and the retailer. Transactions that rely on the payment system provided by the card provider may exempt the merchant from having to pay payment processing fees, which is an additional benefit. 

Private-label credit cards are more profitable for retailers than ordinary credit cards because processing charges for regular credit cards can be higher than 4 percent for each transaction. 

Purchases Made by Customers

Private label credit cardholders, much like those with other kinds of credit cards, have the ability to charge purchases to their available credit lines and are expected to make at least the required minimum payment every month in order to avoid incurring late payment fees. After the grace period is over, interest will start to be added to any unpaid balance, unless a special promotional rate is in place.

Rewards for Loyalty

Cardholders using private-label credit cards are frequently entitled to rewards, discounts, or other types of incentives. Because these benefits may typically only be used within the confines of that particular retailer or brand, they offer significantly less versatility than major credit cards or even co-branded credit cards.

Cards that are co-branded have both the store’s emblem and the logo of a major card network (such as Visa, MasterCard, or American Express). You can use these credit cards anywhere that takes cards from the respective card network.

Financing for Promotional Purposes

Private credit cards can provide promotional financing, which enables the cardholder to settle the debt at a reduced interest rate, with no interest at all, or with interest that has been deferred. There is no set limit on how long promotional periods can go on for. During certain time periods, the merchant makes up for missed interest revenue by paying the card issuer a compensation fee. The longer the duration of the promotional period, the higher the price the retailer will have to pay to the bank partner as a form of interest loss compensation.

If you take advantage of a special financing deal, you may be able to make a sizable purchase without incurring any additional interest charges. However, it is essential to have a clear understanding of whether the interest promotion actually entails a 0% APR or only interest that is postponed. 

If you choose the second option, you are required to pay off the entire sum before the conclusion of the promotional period. In that case, the total amount of interest that has been added since the date of purchase will be added to the amount you still owe.

Should I Get a Credit Card With My Own Private Label?

Due to the fact that they are not supported by a significant credit card processing network, you may typically only use them at the stores themselves or at the sister brands of the retailers. For instance, if you have a shop card for Old Navy, you can use it to pay for your purchases at Gap, Banana Republic, and Athleta. 

The lack of flexibility that comes with using a private-label credit card is the primary disadvantage of using one of these cards rather than a major credit card.

In addition, the interest rates on private-label credit cards are typically higher than those on other types of credit cards, which makes it more expensive to carry a balance on a credit card.

Some stores may ask you to give up the chance to earn points on your purchase if you choose a promotional financing plan.

It may be simpler for customers with no credit history or credit that has been harmed to get approved for a private-label credit card, these cards might be an excellent choice for consumers who are looking to establish or repair their credit. After making on-time payments with a private label credit card for a while, it might be easier to get approved for a major credit card.

The Benefits and Drawbacks of Using Private-Label Credit Cards

Pros

  • can rake in the rewards.
  • There are relatively simpler requirements compared to those of other sorts of cards.

Cons

  • A very high APR
  • They are not applicable in all situations.
  • Deferred interest

The Positives Explained

You may be eligible to earn rewards by using some shopping credit cards, which allow you to accumulate rewards based on the amount spent. Often, you may be able to use these rewards to get discounts on future purchases.

Retailers tend to accept applications from a wider range of people, even those with bad credit. This makes it easier to get these cards than other kinds of credit cards.

Cons explained

The annual percentage rate (APR) of a typical credit card from a store is much higher than the APR of a credit card from a place other than a store.

They are not applicable in all situations. When you use a private-label credit card, you are only able to make purchases at that particular shop and, if relevant, any other brands that are owned by the same firm.

Although deferred interest can help you save money if you pay off your purchase by the end of the promotional period, it can cost you hundreds of dollars in interest (depending on the size of the initial purchase) if you are unable to pay off your balance by the deadline. Deferred interest can help you save money if you pay off your purchase by the end of the promotional period.

Possible Substitutes for Private-Label Credit Cards

You are able to use co-branded credit cards anywhere, despite the fact that they offer many of the same perks as private-label credit cards, such as the opportunity to receive points and discounts that are special to a particular brand (not just at the retailer).

You are able to use general-purpose rewards credit cards, often known as “flexible” rewards credit cards, wherever the card network is accepted, and you will still be able to earn rewards on your purchases. 

These credit cards are not affiliated with a particular brand. The rewards that can be earned with a credit card can be used for a variety of purposes and are not limited to a single retailer or brand.

Key Takeaways

Private label cards, commonly referred to as shop cards, are a type of credit card that may only be used at a certain store.

If you use some private-label cards, you may be eligible for discounts and points.

If you make a purchase that comes with a promotional deferred interest rate, you need to make sure that you pay off the full sum before the end of the promotion period.

There are a number of viable alternatives to private-label credit cards, including co-branded credit cards and generic rewards credit cards.

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