Beware retail credit cards
Save now, sure, but you can pay big later.
Walk into any store during the holidays and the odds are good that you’ll be pitched with a credit card offer. Need an extra 15% or 20% off on the spot? Open a credit card.
But not so fast. A simple move to save money now could cost you a lot of cash in the long run if you don’t watch out for the hidden costs of those popular credit cards being offered at stores at the mall.
During peak shopping seasons, such as Christmas or back-to-school, consumers are more likely to open a retaillabel credit card, said Michael Moeser, director of payments practices for Javelin Strategy & Research.
Two key features of store credit cards resonate with shoppers: Consumers can get an extra credit line to spend more money on gifts. And there’s that added savings on top of already discounted prices.
“This year is no different than years past where the instant discount at the point of sale is the most compelling draw to sign up a consumer,” Moeser said.
So what could rip into your wallet here?
1. This is not exactly a cheap way to borrow
Don’t dwell on the 15% or 20% discount you’d get at the store if you open up the card.
Instead, take a hard look at the interest rate you’re going to face on a store brand credit card if you don’t pay off all those gifts when the bill is due.
You’re looking at a 25.99% annual percentage rate on an Ann Taylor credit card or a J.Crew card. A Carson’s card has an APR of 24.99%.
The average APR on a store credit card is 28.26% — compared to 26.72% a year ago, according to a survey by WalletHub. Rates are typically variable and will go up when the prime rate increases. The prime rate will go up again when the Federal Reserve raises rates, as expected, this month. Other rate hikes are expected in 2018 as well.
By contrast, the average rate on credit cards issued by banks or credit unions is around 16.5%, according to CreditCards.com. Some consumers who shop around and have good credit can find credit cards with rates around 10% or lower.
“It just doesn’t make sense to pay 25% on a card to save 15% on a purchase,” said Matt Schulz, senior industry analyst for CreditCards.com.
2. Late fees can make a discount meaningless
Say you save 15% on a $200 purchase, or $30. If you’re going to have trouble making payments on time, you could face a late payment penalty of $27 or more.
Terms for some store credit cards indicate that the late payment fee can be up to $37 or $38, especially if you make repeated late payments.
Terms for the Kohl’s credit card, for example, note that the late payment is
$27, if your balance is greater than $50. Your late payment fee will be zero if your balance is $15 or less or $15 if your balance is greater than $15 but less than
$50.01. The late payment fee will not exceed the amount of your minimum payment due.
Read the fine print. And pay attention to when the bills come due.
3. Spending more money does not mean you’re saving money
One goal retailers have when they issue you a store-branded credit card is that they’re trying to turn you into a more loyal customer. They track your spending — and bombard you with sales and deals via email or regular mail throughout the year.
“They can email offers to you, which means you may end up spending more money because you purchase items on sale,” said Bill Hardekopf, CEO of LowCards.com.
Many store cards offer rewards or points, which you can use when you buy more things at that specific retailer, so the spending cycle continues.
4. An “interest-free” offer on a store card can be tricky
To be sure, getting a discount on your purchases for opening up a credit card in a store can work out just fine, especially for consumers who will pay the bill on time and in full. Private label cards that some experts favor include Kohl’s and Amazon Prime.
But consumers can be misled by “special financing” offers for larger purchases — which usually are a deferred interest trap, according to WalletHub analyst Jill Gonzalez.
The Consumer Financial Protection Bureau noted this year some special financing promotions may shock consumers with high, retroactive interest charges after the promotional period ends. The watchdog bureau suggested that companies consider using promotions that carry less risk for consumers.
A 0% credit card offer has a set promotional period, maybe 12 months or longer, where interest does not build at all.
But with some interest-free offers, consumers must pay off the bill by a set date. If the bill isn’t paid in full by that date, consumers may discover they owe a large amount of interest that has been accruing since the date of purchase.
The federal consumer watchdog agency noted that the interest rate on these cards is generally about 25%, so the interest owed can be substantial.
Another key point: Many times, a minimum payment is required during the “same-as-cash” period. If the minimum payment is late, the borrower might no longer qualify for a “no-interest for 12 months” type of program.
Shoppers need to pay attention to the specific date for when the promotional or deferred-interest period ends.
5. Open too many new cards at once and your credit score could suffer
In general, store credit cards tend to have more lenient approval requirements and can be easier for a consumer to open than a bank-issued credit card, according to WalletHub.
But going to every store and opening a new card this holiday season can drive your credit score down — which could create problems if you were planning to take out a car loan or a mortgage next spring.
“If they open too many new accounts at once, it will negatively affect their credit scores,” Moeser said.
Another risk: Many times a store card might come with a $500 or $1,000 limit, so if you spend too close to that limit, you would damage your credit score, as well.
Saving money at the checkout is one thing, but make sure you don’t trigger all sorts of other costs.