THE TRUTH ABOUT RETAIL CREDIT CARDS

How many times have you been standing in line at a store, ready to pay for your items, when the cashier asks, “Would you like to sign up for our credit card? You get 15% off your purchase today if you’re approved!” I don’t know about you, but I quickly say, “No, thank you” and proceed to use a general card instead.

So you might be wondering, what’s the big deal with using retail credit cards?

Let’s take a look at some of the cons you might run into when applying for a retail credit card.

SIGN-ON “PERKS”

Retailers will use discounts at the checkout counter to lure you into applying for these cards. While the immediate discounts may seem enticing, you shouldn’t feel pressured to sign up without doing some research first. These initial discounts may seem great at the beginning, but if you have a hard time paying off the full balance each month, you will be hit with high interest charges.

HIGHER PERCENTAGE RATE

The annual percentage rate, or APR, is higher on retail credit cards than general cards. What this mean for you, is that you will end up paying much higher in interest if you don’t pay off the balance on your store card each month. According to creditcards.com, retail card APRs are about 9 percent higher than non-retail credit cards. Creditcards.com also mentions that the average store-brand card has a 24.99% interest rate. On the contrary, the average general credit card has a 16.15% interest rate. Retail credit cards have higher interest rates because these cards are offered to customers who are just starting to build credit history and may be approved easier than a general credit card.

LOWER CREDIT LIMIT

Retail credit cards usually come with a lower credit limit than a regular card as well, but it is possible you will be at or near the limit faster and increase your credit utilization ratio, ultimately hurting your credit score. It is very easy to max out a $400 credit card in one day, especially if it is from your favorite store. Avoid being lured into "savings" opportunities that the store offers so you don't end up going overboard with purchases.

CO-BRANDED VS. SINGLE STORE CARDS

Another important thing to keep in mind is that there are different types of retail credit cards. Some retail cards can only be used for purchases from that retailer. Other types of retail cards will have the name of a retailer but can still be used at other locations. I definitely recommend getting a cobranded credit card if your favorite retailer offers one instead. This way, you have the flexibility to use the card at other retailers and not be bound to just one store.

If you do choose to open store credit cards, ask these questions first, in order to gain the most benefits from your card and avoid getting yourself into trouble.

ARE THERE ANY REWARDS?

Ask what is the percent you will earn back in points for every dollar that you spend. A 5% rate is definitely much better than 1%. If you have a store that you frequently do all of your shopping at, then it would benefit to have a card from that store with a high percent reward rate.

IS THERE AN ANNUAL FEE?

Make sure that the benefits you are receiving will exceed the fee. The Starbucks card has a $49 annual fee, for example, and the Amazon Prime Rewards Visa requires a Prime membership, which costs $119 a year, in order to receive 5% back on purchases.

CAN YOU PAY OFF THE BALANCE?

If you plan to carry a balance, then a retail card may not be the best option for you, as it will come with higher interest rates compared to general credit cards. If you do plan on carrying a balance, you are better off getting a card with the lowest interest rate possible.

WILL YOU BE TEMPTED TO SPEND?

Many rewards cards will send you coupons and discount offers through mail or e-mail. You may not necessarily NEED to buy something, but will be tempted to do so because you want to take advantage of the “savings”. If you happen to have a coupon for a store you were already going to make a purchase from, great! Otherwise, throw out those coupons and avoid unnecessary spending.

IS THERE AN ANNUAL FEE?

Make sure that the benefits you are receiving will exceed the fee. The Starbucks card has a $49 annual fee, for example, and the Amazon Prime Rewards Visa requires a Prime membership, which costs $119 a year, in order to receive 5% back on purchases.

HOW CAN YOU REDEEM THE REWARDS?

A card that only allows you to use points to redeem at that specific store may be too limited. If the card offers cash back instead, you would be able to use that money to buy anything from anywhere!

Retail credit cards don’t necessarily have to be a bad thing, but it does help to do your research in order to maximize the benefits from the card, and avoid overspending. I recommend applying for and using general credit cards, but if you do choose to get a retail credit card, try to apply for a cobranded card that can be used at various retailers, instead of a specific store.

Check out this video on the Keeping it Real with Credit channel to learn more about retail credit cards: