Retail credit cards seem great- they give shoppers 10, 20, maybe even 25% off their purchase today. The application is fast, simple, and consumers are almost guaranteed to be approved for the credit card. However, store credit cards are not as good as they seem. While they may offer savings to consumers who sign up on the spot, here are some reasons why retail credit cards can be dangerous:
- Retail credit cards have high interest rates. They can have interest rates of 25% or higher for both good credit and bad credit consumers. While the average interest rate for most regular credit cards is close to 15%, store credit cards are astronomically higher. Furthermore, a penalty rate close to 30% will kick in on most cards if users miss a payment.
- Store credit cards have poor introductory periods. Most credit cards offer special promotions during the intro period, such as 0% APR on purchases and balance transfers. However, retail credit cards do not offer such deals. Some even hit cardholders with deferred interest after the intro period ends. So, if a user does not pay off the entire balance before the intro period ends, that user will have to pay interest on all of his or her purchases during that time, even on the balance he or she has already paid off.
- Credit cards from retailers don’t offer the best rewards. Card members may receive rewards and benefits within that specific store, but they won’t get anything from anywhere else. With the limited rewards and high interest rate, consumers won’t want to use their store-branded credit card in other places.
- Lastly, retail credit cards can cause credit score damage. Every time a consumer applies for a new credit card, his or her credit score drops. If retail credit card users constantly get new store credit cards, their scores can drop significantly. Store cards also have low limits. A person's utilization ratio- how much credit he or she uses compared to how much credit is available to him or her- factors into a person's credit score. So, if a cardholder buys $400 with his or her $500 store credit card limit, he or she has a higher utilization ratio, resulting in a lower credit score.
Overall, retail credit cards can be dangerous. Consumers may end up in debt with a damaged credit score. So, stay informed before getting a store credit card!