Many paying dearly for credit cards
More moms and dads are shopping for school supplies at business supply stores like Staples, and many probably found the discounts and free shipping offered through the Staples personal credit card tempting.
If they carried the balance for more than 30 days, though, most were probably shocked to discover the card charges an annual percentage rate of 28.99 percent.
Stores are offering more and more rewards to shoppers who use their brand-name credit cards, but they are also cranking up the interest rates to pay for those benefits, according to a new study by CreditCards.com. And sadly, many of these stores target low-income consumers who are the least likely to notice the interest rate, and the least likely to be able to afford it.
The Brandsource credit card charges 30.49 percent interest, while Big Lots, Zales and Piercing Pagoda each charge 29.99 percent. A survey of 65 co-branded and store-only credit cards found the average rate was 24.99 percent.
By comparison, bank credit cards average 16.15 percent, an outrageous number in itself. A typical savings account only earns about .25 percent interest.
The story here is the same as in Las Vegas, the house always wins. No amount of cash back, no number of discounts and no amount of points will ever bring the average consumer out ahead if he or she carries a
“The average retail card rate is so absurdly high that folks who will carry a balance should look elsewhere.” Matt Schulz, CreditCards.com
balance on these cards.
“The average retail card rate is so absurdly high that folks who will carry a balance should look elsewhere,” said Matt Schulz, CreditCards.com senior industry analyst. “Even if you get a 10 or 15 percent discount on what you’re buying with that card, the math can work against you in a hurry if you don’t pay your bill in full at the end of the month.”
Admittedly, some consumers are experts at playing the credit card game. They know exactly how large a discount they will get by accepting a credit card, but they pay it off immediately and shut down the account. More power to those who know how to play that game.
Most consumers, though, shouldn’t be fooled by the tempting offer, particularly if money is tight. These credit cards can create the same trap as payday loan stores, where you spend all of your effort paying off the interest just to discover you’ve never paid down the original loan amount.
Expensive credit is one of the main reasons living in poverty is so expensive. If you don’t have enough money to cover a $500 emergency, which most Americans don’t, then you end up relying on credit to pay monthly bills. Because you are poor, creditors charge you higher interest rates, making that borrowed money very expensive.
That is what’s happening at companies like Zales and Big Lots. They know that the customers who need credit are high-risk, so they charge high interest rates. That way they make money even though some customers are never going to pay off their balances.
Wealthier people, who have savings to deal with emergencies, pay off their credit card balances every month and never pay interest. That helps them preserve wealth while they enjoy the credit card’s rewards program. These people pay for the privilege via higher prices charged by the retailer.
Financial literacy is a major issue in this country. Many consumers don’t understand that credit card interest rates vary. Young consumers don’t recognize the threat to their financial well-being. I know I didn’t when I was 20 years old, and I took every credit card on offer.
That’s why everyone should share this information far and wide to help our friends and family avoid the credit card trap. For too many people, that 5 percent discount at the register to open a credit card account is simply too tempting.
Chris Tomlinson is the Chronicle’s business columnist. His commentary appears on Sundays and Wednesdays. He also posts a daily news analysis at HoustonChronicle.com/Boardroom.chris.tomlinson@chron.com twitter.com/cltomlinson