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 percent or 20 percent off on the spot? Open a credit card.
But not so fast. A simple move to save money right now could cost you a lot of money in the long run if you don’t watch out for the hidden costs of those popular credit cards offered at stores at the mall.
During peak shopping seasons, such as Christmas or back-to-school, consumers are more likely to open a retail-label credit card, said Michael Moeser, director of payments practices for Javelin Strategy & Research.
During summer’s peak driving season, by contrast, we’re tempted to open a gas-related credit card.
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.
Some retailers even go so far as to offer that extra discount beyond just one day of shopping he said
So what could rip into your wallet here?
- This is not exactly a cheap way to borrow: Don’t dwell on the 15 percent or 20 percent 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 comes.
You’re looking at a 25.99 percent annual percentage rate on an Ann Taylor credit card or a J.Crew card. A Carson’s card has an APR of 24.99 percent.
The average APR on a store credit card is 28.26 percent — compared with 26.72 percent 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 if the Federal Reserve raises rates, as expected, this month. Other rate increases are expected in 2018.
In contrast, the average rate on credit cards issued by banks or credit unions is around 16.5 percent, according to CreditCards.com. Some consumers who shop around and have good credit can find credit cards with rates around 10 percent or lower.
“It just doesn’t make sense to pay 25 percent on a card to save 15 percent on a purchase,” said Matt Schulz, senior industry analyst for CreditCards.com.
A store-branded credit card is a really bad choice, he said, for anyone who can’t pay off the bill in full each month.
- Late fees can make a discount meaningless: Say you save 15 percent 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 $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 over $50. Your late payment fee will be zero if your balance is $15 or less or $15 if your balance is over $15 but less than $50.01. The late payment fee will not exceed the amount of your minimum payment due.
But the Kohl’s terms note that if you pay late and then pay late again in any of the next six consecutive billing cycles, the late payment fee will be up to $37. That $37 fee would be charged until you make the minimum payment on time for six consecutive billing cycles.
Read the fine print.
And pay attention to when the bills come due. It’s way too easy to lose track of a bill — especially if you use a credit card only for a specific store every once in a while.
- 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 e-mail or regular mail throughout the year.
“They can e-mail 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.
If you think you’ll be too tempted to overspend in 2018, do you really need another reason to spend?
- An “interest-free” offer on a store card can be tricky: 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 said this year that 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 percent 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 find that 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 percent, 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.
Remember: The minimum payment alone may not be enough to pay off the balance by the end of the period.
Shoppers need to pay attention to the specific date a promotional or deferred-interest period ends.
- Open too many new cards at once and your credit score will 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’d 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.
Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at firstname.lastname@example.org.
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