Department Store Credit Cards: Just Say No

Photo (cc) by 401(K) 2012

This post is from partner site LowCards.com.

We’ve all been tempted by the immediate benefit – save 10 percent or maybe even 15 percent on your current purchase when you apply for the store’s credit card.

But this isn’t a wise financial move for most consumers.

Most retail stores offer credit cards with interest rates between 23 percent and 30 percent, much higher than bank-branded credit cards. According to the LowCards.com Weekly Credit Card Rate Report, the average advertised APR last week among the nation’s 1000-plus credit cards was 14.04 percent.

Some cards, such as the NAPA AutoCare Easy Pay and the Lane Home Furnishings Credit Card, are charging a jaw-dropping 30 percent interest on credit card purchases. Both Goodyear and Zales have 28.99 percent APR on their cards; Office Depot Personal Credit Card charges 27.99 percent; Sears charges 25.24 percent; and Macy’s credit card has a 24.50 percent APR.

Retail cards, also known as private label credit cards, carry higher interest rates than bank-branded cards because they tend to be held by riskier borrowers with fewer credit options. Issuers suffered significant losses on these private label cards during the financial crash of 2008. In fact, General Electric and Citigroup, two of the largest issuers of private label cards, indicated that they wanted to sell off their private label business but both failed to find a buyer.

But in the past year, default rates have dropped significantly and private label cards with high rates are more appealing for banks and issuers that need the revenue. According to The Wall Street Journal, Wells Fargo is considering getting into the private label business. Packaged Facts forecasts receivables for private label card programs to reach $152 billion by 2015 (down from the pre-recession of $156 billion in 2007).

There are plenty of reasons to avoid these retail credit cards:

  • Extraordinarily high interest rates apply to every applicant, no matter your credit score. If you use the card to pay for a purchase and know you can’t pay it off, you should add in the cost of your interest penalties to the price of your purchase. If your interest rate is 29.99 percent on a card with a $500 balance and you just make the $20 minimum monthly payment, it will take three years to pay off your balance and you will pay $295 in interest payments. Instead of paying $500 for the purchase, you are paying almost $800.
  • Retail cards can pull down your credit score. Retail cards usually have low credit limits since merchants want to minimize their financial risk. If you carry a balance, this will increase your credit-utilization ratio, which is an important factor in your credit score.
  • If you apply for multiple retail cards, this can also pull down your credit score for two reasons. Opening these store accounts will lower the average age of the cards in your credit history, and the length of credit history accounts for 15 percent of your credit score. Secondly, every time you apply for a card, the issuer may pull your credit score, which is a “credit inquiry.” Too many credit inquiries can lower your credit score.

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