Beware of store credit cards this holiday. Here's why they may end up costing you more.
Store credit cards seem like a good deal with those introductory discounts and initial interest-free payment periods. But if you're not vigilant in paying them off, just wait until the bill comes due, warn experts.
Store credit cards can be used only at that store or retail chain and are usually offered at the register as you're checking out. The cashier will usually tell you if you get a store credit card, you can get a discount on your entire purchase, earn rewards and possibly, get a "special financing" deal.
Sounds great, until you consider the interest rate you'll be charged and how it will be charged if you don’t pay off the balance before the low interest or interest-free period ends.
It’s what industry experts call the “deferred interest” that can sink you. Fail to pay off your debt before the expiration and not only the sky-high interest rate but also the way it is retroactively applied has the potential to make holiday purchases up to 27.5 times more expensive than expected, according to WalletHub senior researcher Alina Comoreanu.
How does deferred interest work?
At the end of the promotional period, an extremely high interest rate usually kicks in. The average retail credit card annual percentage rate hit a record high of 26.72%, from 24.35% last year, according to an annual CreditCards.com study. By comparison, the average general-purpose credit card charged 22.66%.
But here’s the real danger: the rate will apply retroactively to your entire original purchase amount as if the low introductory rate never existed.
For example, you charge $2,000 and plan to pay it off before your promotion ends. Things come up, and you have a balance of $100 instead. The new rate will be charged on the full $2,000.
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Are all retail credit cards bad?
No, but consumers should be careful and know what they’re getting into, said Ted Rossman, senior industry analyst at CreditCards.com.
“Assuming you can pay your bills in full and avoid interest, the rewards can be compelling if you’re loyal to the store,” said Rossman, citing examples such as 5% cash back at Amazon.com, Best Buy and Lowe’s.
Plus, store cards are generally easier to get than general-purpose cards, and if you can regularly make on-time payments, they can help you build or improve your credit, according to the Consumer Financial Protection Bureau.
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Is there a better option?
General-purpose cards that can be used anywhere are likely a better option.
“These tend to offer more flexibility, more generous rewards, and better interest rate promotions,” Rossman said.
If you have a deferred interest card that looks like it will still have a balance when the promotional period ends, you might want to consider transferring that balance to a 0% interest general-purpose card to try to pay down the debt, experts say. If a balance remains after the promotional period expires on the general-purpose card, interest will only be charged on the existing balance, not the original balance.
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“There’s a good chance you’ll be offered a retail credit card this holiday season,” Rossman said. “Don’t get pressured into making a bad decision at the checkout counter. Any rewards would only be worthwhile if you can pay your bills in full and avoid interest.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at email@example.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.