Steer clear of retail credit cards
It’s the holiday season, which leads inexorably to annoying music and holiday shopping. Retailers are going to offer an in-house credit card and claim there is a “discount,” but don’t buy it.
Sears card sears your checkbook
A familiar scene: A person approaches the checkout counter at a popular retail store with an armful of stuff. Once there, the clerk asks “Would you like to apply for a store card? It’ll save you 20 percent or more right now.”
People doing their Christmas gift shopping are going to hear this a lot. Many stores offer them, and the attraction of savings can make it seem like a good idea to get one of these cards, but ultimately it is best to avoid store or retail credit cards.
One of the primary reasons to steer clear of store credit cards is they carry higher interest rates. The rate varies, according to Today, but the interest rate is usually about 10 percent more than the average, non-store credit card.
According to Fortune, the website LowCards.com, which surveys 1,000-plus credit cards, found that the average credit card interest rate was 14.26 percent earlier this year.
The APR on the Sears credit card, through Citibank, is 25.24 percent. Macy’s charges 24.50 percent for the Macy’s card. Check the interest rate before agreeing to any credit card offer; the lower the interest, the lower the payments.
Bigger risk to credit rating
Another downside to a store credit card is that the limit, according to Nasdaq, is lower than a normal credit card. A typical credit card might have a limit of several thousand dollars; a retail credit card may have a limit of a few hundred and it can only be used in one or a few different stores.
A corollary to that is what’s called a credit utilization ratio, or the amount of available credit being used by any given credit account. In other words, if a person has a $400 balance on a $600 limit card, they are using 67 percent of their credit, which the credit rating agencies interpret as high, thus leading to a ding on the user’s credit score. Also, multiple applications for credit cards results in credit rating hit.
Given that plenty of rewards credit cards are offered by typical credit card issuers that offer frequent flier miles, cash back or points towards free gas, interest rates are lower on normal cards, and they can be used everywhere, it’s better to just use a normal credit card instead of a store credit card or “private label card” as they are called. It’s also better to stay out of debt in the first place.