Beware of store credit card offers as interest rates hit new highs

Holiday retailers double down on promoting store-brand credit cards, which often seem attractive to consumers, especially when they offer instant discounts.

The catch; Store credit cards now have record interest rates and can lead shoppers to debt accumulation. The average annual percentage rate (APR) on retail store cards is now 26.72% — a record high and up from 24.35% last year, according to an analysis by CreditCards.com. The average APR for general purpose credit cards is 22.66%.

Kroger, the nation’s largest grocery chain, recently raised the APR on its new credit card offers to a new high of 30.74%.

30% has long been considered an unofficial ceiling below which most card issuers have kept their interest rates.

Cards with interest rates higher than 30% were typically issued by smaller banks and aimed at customers with poor or no credit, according to Lending Tree. The cards issued by the big banks that dominate the credit card industry just didn’t go there.

The Kroger Rewards World Elite Mastercard, issued by US Bank, beat that limit with an APR range of 17.74% to 30.74%.

“The fact that the largest grocer in the country was one of the first to do it matters. The fact that the card is issued by one of the top 10 card issuers in the country also matters,” said Lending Tree’s chief credit analyst, Matt. Schultz said in a statement to CBS MoneyWatch. “This means these rates are becoming mainstream, albeit slowly, and that does not bode well for consumers already struggling in the face of rampant inflation.”

Wayfair and Speedway also raised interest rates as much as 30.74 percent on name-brand credit cards, according to Lending Tree.

Personal finance experts warn against signing up for store cards, especially if you can’t pay off the balance in full each month and face interest charges. If you carry a balance over to the next month, the interest is compounded and adjusted to what you owe.

“If you’re considering a store card, make sure you can always pay in full. If you pay in full, you don’t get charged that rate,” said Ted Rossman, senior industry analyst at CreditCards.com. “If you have a balance, you are charged interest every day and that can be significant for weeks, months and years.”

Beware of these offers

Some retailers offer products that promise not to charge customers interest on unpaid balances for 12 months, but once that period ends, apply a fixed APR retroactively. These so-called interest deferral offers may sound appealing, but they are often deceptive and come back to bite consumers down the road.

“Deferred interest is a nasty tactic that many store cards use,” Rossman said. “They might say interest-free for 12 months, but if you can’t pay off your balance in full [during that period] they come back and later charge you for all the interest that would have accrued.”

Do your homework

Rossman also advises against making a spur-of-the-moment decision to get a store card at checkout, urging people to instead ask for a brochure and research the product. That’s because a 15% discount at the point of purchase can come with lanyards.

“You could think you’re choosing a store rewards program without realizing it’s a credit product with an interest rate, debt and credit score,” he told CBS MoneyWatch.

It’s especially worth keeping an eye out for during the holidays, when retailers ramp up branded card marketing

Also research the rewards a store card offers and compare them to the perks you get from general purpose credit cards.

“There are opportunity costs even if you’re not charged interest. It might not be a good card for you if you’re not earning as many rewards,” Rossman said.

Meanwhile, if you spread your spending across several different retailers, it probably doesn’t make sense to sign up for a store card, especially if it’s only good at one store brand. Some stores’ cards are cobranded and can be used anywhere Visa or MasterCard are accepted, for example.

When a store card makes sense

Applying for too many lines of credit can also affect your credit score, so choose carefully.

“When you’re building and accessing credit, you don’t want to waste an application because you’re being pressured by the credit bureaus if you apply for too much credit in a short amount of time,” Rossman said.

Some store credit cards may make financial sense if you’re able to pay off your balance in full each month and if they offer significant rewards at a retailer where you make a lot of purchases.

For example, Amazon, BestBuy, Target, Walmart and Wayfair all offer credit cards that give customers 5 percent cash back on all purchases, Creditcards.com notes in its analysis.

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