Retail: The pros and cons of store credit cards
“It’s that time of year when store clerks try to tempt you to open a credit card to get that extra discount on your purchase,” said Sheryl Nance-Nash in New York Newsday. “Should you take the bait?” Store-branded credit cards can make a lot of sense if you pay off your balance every month; the discounts and perks can be substantial, especially around the holidays. But the cards “can come with a price.” Store-branded cards routinely charge rates “twice as high” as regular credit cards, said Abha Bhattarai in The Washington Post. The average interest on store cards has gone up for the past three years and is now 25 percent, compared with 16.15 percent for regular cards. Shoppers may not realize rates are so high, because sign-ups are often “spur-of-the-moment, spontaneous decisions” at checkout—hardly an environment conducive to reading the fine print on a credit contract.
The main reason the interest rates are so high, said Annie Sciacca in MercuryNews.com, is that store cards “are easier to get than most general-purpose credit cards.” That makes them more susceptible to delinquency and default. The higher rates, banks say, offset the increased risk. Banks and retailers typically share revenue from fees and charges, but the cards are still a powerful way to gain customer loyalty. For some retailers, they are also “an essential way to bolster their struggling businesses,” said Michael Corkery and Jessica Silver-Greenberg in
The New York Times. In an industry buffeted by Amazon and changing shopping habits, store cards can “generate a rich profit stream.” At Macy’s, the money from store credit cards accounted for 39 percent of the company’s $1.9 billion in total profits last year, up from 26 percent in 2013. At Kohl’s, the profits from branded plastic totaled 35 percent, up from 23 percent four years ago. That payment flow might be masking the pain some of these retailers are experiencing. And “if more consumers fall behind on their payments, the profits could dry up, intensifying their troubles.”
“If you’re prone to shopping binges or already struggling with credit card debt, signing up for a store account is probably a bad idea,” said Shannon Gupta in CNN.com. Even if you diligently pay your cards each month and “you’re a responsible spender,” you should consider the outsize influence opening a branded card can have on your credit score. Because the application “involves a hard pull on your credit,” merely applying may temporarily hit your score. And once open, the cards “can be challenging to undo.” Make sure you ask how much time you have before a regular interest rate kicks in and whether you can use the card at other retailers. If you are feeling pressured by a pushy sales associate, “stand your ground,” take a brochure home, and think it over.