Retail Credit Cards Charge Much Higher Interest Rates

NEW YORK (MainStreet) — Retail credit cards charge much higher interest rates than most credit cards with an average APR of 23.23%, according to a new CreditCards.com report.

The average APR of credit cards issued by America's largest retailers is more than eight percentage points higher than the national average for all credit cards. The highest APRs are charged by Zales, the jeweler at 28.99%, Office Depot at 27.99% and Staples at 27.99%, both office supply stores.

The high APRs from retail credit cards result in many consumers paying interest fees that are nearly as much as the original balance.

If a consumer has a $1,000 balance on the average retail credit card and makes only the minimum payments, it would take the cardholder 73 months to pay off the balance and he/she would incur $840 in interest fees.

That's 17 months longer and $444 more expensive than a $1,000 balance at the national average APR of 15.03% for all credit cards.

Consumers should avoid falling into traps like signing up for a retail credit card to save 15% on a purchase, said Matt Schulz, CreditCards.com's senior industry analyst. The much higher interest rates far outweigh the one-time discount for anyone who carries a balance.

"A lot of times there are these pressurized situations and people won't take a step back and read through the particulars of the card," he said. "Tread very cautiously."

In most instances, the retail stories will offer the same incentives to customers at a later date, so reading the rules in an "informed and calm" situation before making a decision is the best strategy to follow, Schulz said.

The best bet for consumers who can not pay off their credit card balance each month is to pay the card with the highest interest rate first, Schulz said.

CreditCards.com surveyed the 36 retailers from the National Retail Federation's Top 100 Retailers of 2014 list that offer credit card programs. The analysis included APRs, co-branded offers and rewards programs. The selected retailers offer 61 cards within their consumer card programs: 32 store-only cards, 27 co-branded (use-anywhere) cards and two debit cards.

The average retail credit card charges more than twice as much as the average low-interest credit card. Those higher rates can mean big costs for consumers. At the average low-interest APR of 10.37%, the interest falls to $232 and the payoff time shrinks to 50 months.

This means someone who uses the average low-rate card rather than the average retail card would save more than $600 and be out of debt 17 months sooner.

Cardholders who pay their balances in full each month can find value in retail rewards programs. The number of programs is on the rise and multiple tiers are being added to encourage loyalty (and spending). Of the 36 surveyed retailers, 22 offer introductory financing rates, instant rewards or both. Retailers are adding cardholder-only specials, too. Some retailers will offer rewards that the more generic credit cards don't offer such as a discount off purchases made that day. Others such as Macy's and Nordstrom offer rewards programs, VIP access to in-store events and early access to sales, he said.

More than two-thirds of the retailers that CreditCards.com analyzed offer credit cards that can be used anywhere, not just at the issuing retailer's locations.

In 2010, the average APR for retail credit cards was 21.22%. More information is available here.

While many people who are trying to build or rebuild credit begin with a retail credit card, people need to use them responsibly due to the high interest rates on these types of cards, said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling. Consumers need to make certain they do not carry over debt from month to month.

Another thing consumers should be aware of is that retail cards may have low lines of credit. The NFCC recommends not utilizing more than 30% of the available credit.

"Since utilization is the second highest weighted element of the credit scoring model, doing otherwise could negatively impact the score a person is trying so hard to improve," she said.

Retail credit cards have the same impact on a person's credit score as traditional credit cards so consumers need to understand the effect of not paying off a store credit card, said Jeff Golding, CEO of WilliamPaid, a Chicago-based company which allows consumers to pay rent online and build their credit.

Some consumers wind up making late payments on the store credit cards unintentionally because it is their first experience obtaining credit and they don't understand how the process works, not because they lack the money to make payments, he said.

"Consumers don't think of store credit cards as the same as the traditional Visa card," Golding said. "People don't understand it is a bank lending the money, not the store."

--Written by Ellen Chang for MainStreet

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