When checking out at the cashier, a store clerk might ask if you want to receive, say, 20 percent off your purchase. All you have to do to get the savings is sign up for a store-branded credit card. Should you go ahead and do it?
Matt Schulz, a senior industry analyst at CreditCards.com, says that in general, consumers should avoid signing up at the counter. While the initial discount may be enticing, he says that if you don’t pay your bill in full, the interest rates you’ll be charged are higher on average than those of ordinary credit cards.
CreditCards.com looked at 68 store credit cards at 44 retailers in September and October as part of an annual survey it conducts, and found that consumers who take out store cards face an average annual percentage rate of 23.84 percent. That's well above the national average of 15.18 percent for all credit cards. And those rates are creeping up, says Schulz.
The Credit Card Adviser Comparison Tool will help you choose cash-back credit cards customized for your spending habits.
According to the site's report, part of the reason store credit cards charge higher rates is that they tend to have higher-risk applicants than credit card issuers do.
Tiffani Montez, a retail banking senior analyst at Aite Group, says that the credit limit retailers offer is usually lower than those offered by banks, so a higher rate helps them to make more money off those smaller balances.
While 33 of the cards surveyed by CreditCards.com had APRs higher than 25 percent, the worst rates were found at Big Lots and Zales Jewelers. Big Lots’ APR was as high as 29.99 percent, while Zales was as high as 29.24 percent. At Dillard’s and Nordstrom consumers with lower credit scores could see APRs as high as 25.24 percent and 23.15 percent, respectively.
The best rate offered by a card regardless of your credit score was from Military Star, a credit card that isn't designed for one particular store or chain but for a variety of retailers that provide services to the military. Those retailers include some resort hotels, online websites such as myNavyExchange.com and food courts run by the U.S. Army and Air Force. You must be a member of the armed services to qualify. The interest rate on its card is 10.49 percent.
Another card that offers a flat rate regardless of your credit profile is Costco’s Visa card, which charges 15.49 percent on balances.
For those with good credit scores, Dillard's offers rates as low as 10.24 percent and Nordstrom Visa Signature recently charged 11.15 percent.
Montez says that when card issuers determine your rate, they consider how much they'll charged based not just on your credit score but on other factors such as your debt-to-income ratio. She doesn't expect to see store card rates change much for now, though that could change if the Federal Reserve hikes interest rates.
“The key is not to be pressured into making a bad choice,” Schulz says. “Take the brochure, think about it, then apply the next time you are at the store. Chances are all the perks will still be there, but you will make a more informed decision.”
When to Consider a Store Card
There are situations when you may want to get a store credit card. If you are new to credit or you are rebuilding your credit score, store credit cards can serve as a stepping stone to achieving those goals, Schulz says. One reason is that you can be more easily approved for a store card than a regular credit card. But you need to make sure that you keep your balance low and pay your bills on time. Otherwise, high rates may undermine those efforts.
If you shop frequently at one store, it might be worth considering a card from that retailer. First, consider the rate and how likely it is that you’ll pay off your debt each month. Next, consider the perks and how often you need to shop at the retailer to benefit. If you are a loyal Costco shopper, for instance, you may want to consider its Visa card, which was introduced earlier this year. The card doesn’t charge interest for the first seven months, and provides between 1 and 4 percent cash back on purchases made at Costco.
But if those circumstances don't apply to you and you have a store credit card that charges a high interest rate, pay down any balance quickly or shift the debt to a balance transfer card with a 0 percent rate.
Schulz recommends that you then put the store-issued card away somewhere safe and not use it anymore. Since most store cards don’t charge an annual fee there’s no cost to keeping it once the balance is fully paid. If you cancel the card, though, that can temporarily ding your credit score.
