“Would you like to sign up for our credit card and save an extra 10% on your purchase today?” I’m sure you’ve heard this line before as you pay for your new jeans or whatever new toy the kids are aflutter over these days. If you haven’t been in a big-box store in a while and plan to make an annual pilgrimage to do your holiday shopping, brace yourself for the hard sell on store credit cards. You may be curious about that extra one-time savings or promised cash-back rewards. But it’s probably not worth applying for a new credit card to get those perks.
The average retail credit card has a whopper of an interest rate at 26.01%. That’s compared to the average APR for regular credit cards, which is 21.1%. Creditcards.com examined 88 credit cards from 64 stores to evaluate the store card landscape, and found that store-only credit cards—the ones you can only use at that retailer—have an average interest rate of 23.29%. Some chains, including Zales, Discount Tire and Big Lots have interest rates at 29.99% for their store cards.
These interest rates have risen over the past several years, in line with the rate increases approved by the Federal Reserve. Back in 2014, Creditcards.com notes, the average retail credit card had an APR of 23.23%; in 2018 it was 25.64%.
Why would anyone sign up for a credit card that has an interest rate of anywhere near 30%? Because sometimes it looks like a deal. As part of its annual examination of store credit cards, Creditcards.com surveyed 2,400 adults about their motivations for applying for store cards. The top reasons for getting a retail card were the discount or signup bonus (59%), because they love the store (31%), or because the card was easy to get (29%). Eleven percent of those surveyed applied because they felt pressured by the cashier.
I, too, love a signup bonus. It’s like getting an extra treat. But all too frequently, retail credit cards are a terrible deal. They target people who don’t have stellar credit or who have never had a credit card before, and they often have tricky interest offers that can cancel out any rewards you earn. But retail credit cards remain popular–last holiday season, three in 10 Americans applied for one, according to survey data from CompareCards.
Before the cashier launches into their mandatory credit card schpiel at the checkout counter, here’s how to prepare to evaluate store credit card offers.
Consider how you’ll pay before you shop
Before you walk into the store or sit down at your computer, think about your options for paying for a large purchase. If you need to use credit, do you have a zero-percent offer on a card? If so, use that before considering any card the store offers.
If you’re interested in learning about a store’s credit card offerings, you don’t have to wait until you’re standing at the register, getting eyeballed by a cashier who so desperately needs credit card signups to hit their quota. Whatever discount or reward they dangling to entice you to apply will not be exclusive to the checkout counter. The retailer’s website will have all the info about store-only or co-branded cards available, allowing you to read up on interest rates and deferred interest periods.
Keep a special eye out for these deferred interest offers that can lure you in with the promise of 0% interest for a period of time. At the end of the deferred interest offer, you often get charged the regular interest retroactively—for the whole purchase, not just any remaining balance.
This is pretty unique to store credit cards. A typical credit card will specify that after a 0% introductory period, you’ll be charged the regular interest rate going forward.
Calculate the potential cost of earning rewards
Frequent shopper programs are getting more competitive to try to earn your loyalty, and that extends to those that are attached to a store. Amazon, Target and Best Buy all offer 5% “back” to users of their top credit cards, whether in the form of a discount or a statement credit. That’s great if you plan to never carry a balance. But if your holiday finances don’t work out like you planned, you could end up owing more than you received as a discount.
Let’s say for example that you spend $200 at Target on your RedCard, which offers a 5% discount. You get $10 of that purchase. Happy holidays, y’all.
But you don’t pay it off right away. You let that $200 roll over to the next month. The RedCard has an interest rate of 24.9%. You’ll have to pay about $4 in interest if you only pay $25 right away and leave the rest for the following month. If you only pay $25 per month until the entire bill is paid, you’ll pay $14 in interest.
All of a sudden, that $10 discount you got on your bill seems like a bad deal, right?
That’s because it was a bad deal for you. No small discount or cash-back reward is worth the scary high interest rates store credit cards carry. I’m not saying they’re the worst thing in the world and no one should get one. But you should examine store card offers with caution and resist that carefree, holiday-happy urge to apply on a whim.
Instead, see if there’s a loyalty program you can join without needing to open a credit card. More and more retailers are adding these—like Macy’s and Target, to name just a couple—so customers can earn rewards regardless of how they pay.