Store credit cards seem like a good deal with these introductory discounts and initial interest-free payment periods. But if you’re not vigilant about paying them back, just wait until the bill is due, experts warn.
Store credit cards can only be used at that store or chain of stores and are usually offered at checkout at checkout. 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 finance” deal.
Sounds good, until you consider the interest rate you’ll be charged and how it’ll be charged if you don’t pay off the balance by the end of the low-interest or interest-free period.
This is what industry experts call “deferred interest” that can sink you. Failing to pay off your debt before expiration and not only the exorbitant interest rate but also the way it’s applied retroactively has the potential to make holiday shopping 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 annual percentage rate for retail credit cards hit a record high of 26.72%, up from 24.35% last year, according to an annual study by CreditCards.com. By comparison, the average general purpose credit card charged 22.66%.
But here’s the real danger: the rate will apply retroactively to the full amount of your original purchase as if the low introductory rate never existed.
For example, you charge $2,000 and plan to pay it back before your promotion ends. Things happen and you have a balance of $100 instead. The new rate will be charged on the full $2,000.
Are all retail credit cards bad?
No, but consumers need to 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,” Rossman said, citing examples like 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 make regular payments on time, 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 probably 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 appears to still have a balance at the end of the promotional period, you may want to consider transferring that balance to a general purpose 0% interest card to try and pay off the debt. , say the experts. If a balance remains after the expiration of the promotional period on the general purpose card, interest will only be charged on the existing balance, not on the original balance.
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“Chances are you’ll be offered a retail credit card this holiday season,” Rossman said. “Don’t force yourself to make a bad decision at checkout. Any reward would only be worth it 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 firstname.lastname@example.org and sign up for our free Daily Money newsletter for personal finance tips and business news Monday through Friday mornings.
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