Americans love credit cards, and the major retailers of the world are keen to earn extra revenue with store-branded cards. As the holiday season approaches, every shopaholic and deal-chaser has Black Friday and Cyber Monday on their mind, and the fourth quarter holidays bring about a slew of store-branded credit cards offering discounts and deals.
Department stores, grocery stores, clothing stores, and many other retail corporations offer their own version of a branded credit card. They typically offer a discount, promotion, free gift, or easy balance transfers. The best time of year for retailers to sign up new cardholders is the holiday sales season. Shoppers are hungry for savings on their gift lists, and it’s common to see heavy discounts for same-day shopping on a new card. However, the devil is in the details.
These retailer-sourced cards carry heavy interest rates – as much as 25 percent. That is a full nine percent over the going rate for a consumer credit card (16 percent). According to TSYS, the highest interest rates were the branded credit cards offered by Brandsource, Zales, Piercing Pagoda, and Big Lots. Many retailers had interest rates close to the legislated maximum, 30 percent APR.
Why are the rates so high? The vice president at the National Retail Federation, Craig Shearman, explains it simply: “The reason the interest rates are higher is that retailers are much more liberal in issuing a credit card to customers than the banks might be.” Handing out cards liberally creates a greater risk for the card issuer. Higher risk for the lender, or store in this case, means higher interest rates.
In recent surveys by Experian, Americans are clearly no stranger to multiple cards. The average consumer holds 1.51 retailer cards, and two-thirds of those cards had introductory discounts. As mentioned earlier, the holidays bring more store credit cards into the market, and retailers often double their typical monthly average in December. Consumers often find themselves deciding between using a store card or basic rewards card.
For consumers, these cards often drag them into debt problems long after the tree comes down. Higher interest rates and the subsequent compounding effects make it expensive to roll over debt. If someone struggles to pay off a balance, the trouble only mounts as the interest piles up.
Store cards seem like a great deal, but they often pull borrowers into a debt trap. The retailers typically use your purchase patterns to market specific products and services to you based on your preferences. You can easily spend much more than you should when the discounts and promotions are catered to you.
Used effectively, these cards offer real savings on your purchases and bonus offers to boot. If you carefully manage your spending and take advantage of the card offers, you can “beat the system.” The interest rate doesn’t matter if you always pay your balance in full before the due date, but make sure to check your cardholder agreement.
Credit card companies often profit off people who don’t read or understand the features of the card. Consumer protection laws can only go so far to protect you, so don’t be afraid to search for advice if you are new to credit or struggling with your debt.
Author: Mike Brown
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