The offer sure is tempting.
As you’re getting rung up at a clothing store, department store, home store or other retailer, the cheerful cashier asks whether you’d like to sign up for a store credit card and receive an immediate discount on your expensive purchase. And it’s a big discount, too—maybe even 25% or 30%.
Should you bite?
A new survey suggests you may want to hold off. While three out of four Americans report having had a store credit card, nearly half of those say they regret having gotten it, according to a survey by CompareCards, a website owned by LendingTree.
One obvious reason—potentially sky-high financing charges. The average annual percentage rate, or APR, charged by store credit cards is a nosebleed inducing 24.97%. In contrast, the average rate Americans pay on credit card debt is 16.46% according to the Federal Reserve, still high but more than eight percentage points lower than the store card.
CompareCards reviewed credit cards from 50 of the nation’s largest retailers, including online outlets and brick-and-mortar stores.
Of the 68 cards reviewed, 36 were co-branded, bearing the logo or name of the retailer together with that of a credit card brand like Visa, Mastercard, American Express or Discover. These had an average APR of 23.20%.
The remaining 32 were not co-branded, effectively meaning they could be used only at a particular chain or family of stores. These had a substantially higher average rate, 26.93%.
While most general-purpose credit cards come with a variety of rates based on the applicant’s creditworthiness, 46 of the 68 store cards reviewed offer only a single APR.
Only one store credit card reviewed had a rate below 10%—Bass Pro Shops Club Mastercard, at 9.99%. But that was only for purchases made at Bass Pro Shops or Cabela’s, two camping and outdoor sporting goods chains. Use it to gas up the SUV or for a night on the town, and the rate ranges between 16.99% and 25.99%.
The all-round cheapest card? The Military Star credit card—offered by the Exchange Credit Program and available only to military personnel and their families—sporting a single flat APR of 12.24% for all purchases made anywhere.
The most expensive plastic would be the card from Brandsource, a network of more than 4,500 appliance, electronics, bedding and other retail stores, with a flat but dizzying 30.49% APR. The next three priciest store cards were from Big Lots, Staples and Zales, all weighing in with the same rate of 29.99%.
Why do people sign on? CompareCards found that 56 of the 68 cards it reviewed, or 82% of them, came with a perk for new holders, most often a discount on the consumer’s first purchase.
However, the key math for consumers to consider is pretty basic in such situations. If you are being lured to sign up for a store credit card by a promise of a good discount on a purchase and you are not certain you will pay off your balance before any interest kicks in, that discount could end up being no bargain at all—because interest charges might eat it up and then some.
Americans do seem to have grown wise to the somewhat dubious store credit card pitch. Two-thirds of those surveyed said they were aware that store cards typically charge higher interest rates than other credit cards.
Consumers should be especially wary of special-financing deals from store cards such as an interest-free introductory period—0% for anywhere from six to 24 months.
The catch is that these deals typically come with so-called “deferred interest clauses.” If after, say, 12 months, the consumer hasn’t paid the balance in full, he/she is on the hook for all of the interest that would have accrued on the purchase from the beginning. That’s a deal, all right—a very bad one.