2018 Retail Store Card Survey: Beware 30 percent APRs, ‘special’ financing
Deferred interest plus high APRs is a recipe for financial disaster, if you’re not careful
Personal finance journalist with an eye for industry news
Retail store credit card seekers can expect sticker shock and tantalizing-but-risky no-interest deals when they sign up, according to a new CreditCards.com survey.
Our 2018 Retail Store Card Survey revealed that retail cards’ interest rates have generally risen in line with the Fed’s recent spate of rate hikes. The average median APR for retail cards is 25.64 percent – up 1.1 percent since our last survey in October 2017. (The Fed has raised interest rates by a total of one percentage point in that time frame.)
Many store-only cards combine risky deferred interest deals – typically a temporary low interest rate – with regular APRs hovering near 30 percent. It’s a one-two punch that can land a loyal shopper in financial jeopardy.
“Deferred interest may sound like a good deal, but the fine print can be extremely costly,” said CreditCards.com industry analyst Ted Rossman. “Just $1 remaining would result in retroactive interest being charged on the total balance.”
Our study also found that cards co-branded with payment networks such as Visa and Mastercard tend to have lower APRs (23.06 percent on average, compared to 27.23 percent for store cards) and more consumer-friendly promotional deals. These cards tend to offer more flexible and lucrative rewards programs, whereas store-only cards are likely to pay you back just for purchases from a single retailer.
Here’s what else our survey found about retail store and co-branded cards:
- Retail cards have higher APRs than general purpose cards. The average median APR for all retail cards in our survey is nearly five percentage points higher than that of general-purpose cards (20.82 percent).
- Watch out for “special financing”: Thirty-six cards surveyed offer deferred interest promotional deals, which are sometimes referred to as “special financing.” But what really makes these deals “special” isn’t the temporary no-interest financing – it’s that they charge retroactive interest on the entire purchase price if you don’t pay off the balance within the promotional period.
- Bonuses and first-purchase discounts abound: Sixty-two cards offer new cardholders a reward bonus, a discount on the first purchase made with the card or both.
Deferred interest is a trap for undisciplined consumers
Let’s say you’ve signed up for a store card for a new set of truck tires at Discount Tire or a fancy watch from Zales. Suppose you make your purchase without checking into the card’s interest rate (each store’s card charges 29.99 percent interest).
Several months pass by, the promotional period ends and you’ve failed to pay off the entire purchase amount. But you only owe a balance of $100 or so.
Your next billing statement comes, and suddenly that balance has skyrocketed to roughly the amount you owed several months ago.
For instance, if you used your favorite jewelry store's card to buy a $2,150 watch under a 12-month no-interest deal, you could get it paid off within that time by putting down $180 per month. But suppose you have one lean month in which you only make the minimum payment of $25, and your store card's regular purchase APR is 29.99. You would owe roughly $300 in back interest charges after the promotional period expired. That’s likely enough to buy another less expensive but still elegant timepiece at the same store.
Deferred interest deals can certainly be a trap if you’re not careful. But they can also help you get an expensive item you truly need or have always wanted without dropping a wad of cash in one day – you just have to commit to paying the purchase amount off within a set time frame.
See related: Don't fall into the deferred interest trap
Avoid a retail card ‘gotcha’ by carefully reading its terms
However, there’s evidence consumers are more haphazard in managing store card accounts than regular bank-issued cards. In May, credit reporting agency Equifax released data that showed the rate of severe delinquencies on private label cards had risen to its highest level since 2011.
Missing a payment on a high-interest store card hurts your credit and your wallet. If you’re in a 0 percent promotional period and you flub a payment, you’re likely to lose your interest-free financing right away. If you let the overdue bill slide for more than 30 days, your issuer may report it to the credit bureaus, which would lower your credit score.
But disaster can be avoided if you carefully read a store card’s offer terms and its terms and conditions, paying close attention to the Schumer Box, which lists all applicable rates and fees.
Amy Crews Cutts, chief economist at Equifax, noted the disclosure mandates of the CARD Act largely prevent card issuers and retailers from luring customers into high-APR landmines.
“I think they are offering a truly consumer-friendly thing,” Cutts said. “They certainly make a lot of money off the disorganization of consumers, but I don’t feel that it’s structured to be a ‘gotcha.’”
More retailers are rewarding cardholders for spending with them
Aside from promotional no-interest deals, retailers often use reward and cash back incentives to get customers to become cardholders. And more retailers are rewarding their cardholders for shopping at their stores.
Sixty-four of the cards in our survey have structured rewards programs that include rewards points, cash back or some other type of incentive (such as rewards certificates). That’s a big jump from 2017, when only 52 cards featured tiered rewards offerings.
Here are just a few examples from this year’s survey:
- Rewards: The Academy Sports + Outdoors Visa Card offers 5 points at Academy for every $1 spent using the card. Members also earn 2 points on gas (up to $150 in purchases per billing cycle) and 1 point everywhere else Visa cards are accepted. If you earn 2,500 points, you get a $25 Academy gift card.
- Cash back: The Amazon.com Store Card offers 5 percent cash back on all purchases at Amazon.com.
- Other incentives: The TJX Rewards Platinum Mastercard offers $10 in rewards certificates for every $200 you spend within the TJX family of stores.
Meanwhile, 62 of the surveyed cards offer a reward bonus or a discount for the first purchase you make with the card. For instance, the Belk Rewards Card offers 20 percent off all day, and you can earn a $10 in Belk Reward Dollars when you make a purchase with the card on the same day.
Want the best rewards? Stick with a general purpose card
A retail card can be quite rewarding if it offers you discounts, points and cash back at your favorite store. But general purpose cards usually reward spending at broad categories of merchants – and several of them offer flat cash back rates for all your purchases.
What’s more, many general purpose rewards cards offer lucrative sign-up bonuses, some of which can be earned with minimal spending in your first few months of card membership.
Here are a few examples of general-purpose cards with generous points, cash back and sign-up bonus incentives:
- Rewards: The no-annual-fee Wells Fargo Propel American Express® Card offers 3X points for eating out and ordering in; gas stations, rideshares and transit; and travel including flights, hotels, homestays and car rentals. It offers 1X points on other purchases.
- Cash back: The Discover it Cash Back card earns 5 percent cash back each quarter at places such as gas stations, grocery stores, restaurants, Amazon.com and more up to a quarterly maximum, after you activate. It has no annual fee.
- Sign-up bonus: The Chase Sapphire Preferred Card offers 50,000 bonus points after you spend $4,000 on purchases within the first three months of opening your account. It has a $95 annual fee, but it’s waived in the first year of membership.
Co-branded cards offer everyday rewards and store-specific discounts
If you want the best of both worlds, a co-branded retail card could be a good option. But you may be subject to a higher APR than you would with a general-purpose card.
For example, the Chase-issued Amazon Prime Rewards Visa Signature card offers 5 percent cash back at Amazon.com and Whole Foods if you’re an Amazon Prime member. You also earn 2 percent cash back at restaurants, gas stations and drugstores and 1 percent back on all other purchases.
The card has no annual fee, aside from the $119 you pay each year for your Prime membership. However, it has a maximum APR of 24.24 percent, so it may be best for everyday purchases.
Kevin Morrison, senior analyst for the retail banking and payments at Aite Group, noted issuers use co-branding relationships to strive for the all-important goal of getting their cards to the top of consumers’ wallets. Given Amazon’s wide variety of products and services, its Prime card is a good example of that, he said.
“Amazon has service of an incredibly huge variety,” Morrison said. “That co-brand relationship between Amazon and Chase I would venture to say is very good for both of them.”
See related: How much can you really make with a cash back card?
Retail cards can save you money, if used responsibly
Retail cards may pale in comparison to some of the best general-purpose cards on the market, but they can be useful if managed responsibly. If a store at which you regularly make small and medium purchases – such as Amazon.com, Walmart or Home Depot – has its own rewards credit card, by all means get it if you think it will cut your shopping budget.
But if you’re considering signing up for card to get a 0 percent deal on a big purchase and you’re not 100 percent sure it’s within your budget, tread carefully.
You may be in no mood to enjoy your 4K ultra HD TV if within six months or a year you’re getting slammed with an interest rate north of 25 percent on your card payments. However, if your hot water heater breaks and you feel a retail card’s deferred interest deal is your best option for replacing it, it might be worth taking the risk.
The survey of 81 retail store cards – including 50 store-only cards and 31 network co-branded cards from 58 different retailers, was conducted in September and October 2018 by CreditCards.com using the cards’ terms and conditions.
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