Store Credit Card vs. Cash Back Card: Which Is Better for Holiday Spending?

A few months ago, my wife and I had our first baby. Shortly thereafter, my mother-in-law called to let us know she had shipped a package of Carter's baby clothes. "I got a discount," she said over the phone, "with my new Carter's Credit Card."

My heart nearly missed a beat. A store credit card? I judged. Knowing all the cons of this type of card (high APRs, limited rewards, meager sign-up bonuses), I wished she would have consulted me first.

But when I looked at the card's details, I wasn't completely disappointed. While the Carter's Credit Card earns rewards that can only be used at Carter's stores (no surprise there), the amount you're getting back is pretty high. The card earns 2 points for every $1 spent at Carter's, and you can redeem 150 points for a $10 reward. If we do some math, you have to spend $75 to get a $10 reward, which is almost like earning 13.33% back. That's wild -- no credit card earns that much.

The more I look at store credit cards, the more I realize they aren't as weak as they used to be. In fact, with new card issuers, like Bread Financial (formerly Comenity), building robust rewards programs into them, shoppers loyal to one store might be at a loss without them. If you're on the fence between store cards and cash back cards, let's take a look at which might be more lucrative for you.

If you're enthusiastic about one or two stores, a store card might be right for you

Store credit cards have one thing going for them -- they offer big discounts at their stores.

Take, as a random example, Ulta's Ultamate Rewards Credit Card. The card earns 2 points per $1 spent at Ulta Beauty. You can redeem 100 points for $3 off Ulta Beauty merchandise, which would equal about 6% back. Or you can save your points and redeem 2000 for $125 off, which equals about 12.5% back. Rewards rates like those are hard to come by, even among the top rewards credit cards.

Of course, you're not earning cash back, nor do your rewards have real-world value. Instead, you're earning store discounts, which can only be used toward merchandise purchased at those stores. Not only that, but many of these credit cards are also closed-loop cards, meaning they don't work outside of their respective stores, and they have egregious APRs. Unless the card is issued by a major credit card company, like Mastercard or Visa, you can't use it universally.

That said, if you always buy holiday gifts at one or two stores, store credit cards might be the right kind of card for your holiday shopping. The rewards they earn for their stores are often hard to beat, and you'll likely get special offers or free shipping as a cardholder. They're also easier to qualify for, which could make them useful if you're repairing your credit, and they often don't have annual fees. For loyal shoppers of one or two stores, they're worth considering, even if their rewards are inflexible and redeemable only with one brand.

Don't shop at one store? Get a cash back card

For shoppers who want more freedom with their rewards, cash back cards are the way to go.

Cash back cards may not have enormous bonus rates, like 12% back. But they do have decent rates on everyday spending, and many have bonus rates that earn 2% to 5% back on popular categories, like groceries and gas. Their rewards can be exchanged for real currency, like a dollar deposit into your checking account, and you can use your card at multiple stores, not just one.

If you want the best of both worlds, check out the U.S. Bank Cash+® Visa Signature® Card. This card earns 5% back on up to $2,000 in combined purchases each quarter on two categories of your choice. These categories include department stores, electronics stores, and furniture stores, among several others.

Ultimately, the best card for your holiday spending is the one that helps you save the most money. For the general shopper, cash back cards will likely offer greater savings opportunities, while those who have a clear favorite among retailers might do well applying for a store credit card. Take a close look at how you spend your money now -- without a new credit card -- then compare cards that will reward you for charging your monthly expenses.