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In this Tuesday, Nov. 15, 2011, file photo, customers enter Staples office supply store in Miami. Some of the most expensive store cards are issued by retailers such as Big Lots, Discount Tire, Jared The Galleria of Jewelry, Kay Jewelers, Lane Bryant, Williams-Sonoma, Dick’s Sporting Goods and Staples.
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Holiday shopping alert: Those low interest rates unlikely to be part of store credit card offers

Lynne Sladky/Associated Press

Holiday shopping alert: Those low interest rates unlikely to be part of store credit card offers

Shoppers tackling their gift lists this year are likely to get a sales pitch at the checkout counter that goes something like this: Sign up for a store credit card and receive an immediate discount on what you’re buying.

Sound like music to the ears? Maybe not.

Store credit cards that can only be used at specific company stores or chains are among the most expensive type of consumer credit. The average store card carries an annual interest rate of more than 24%. The highest store cards charge as much as 29.99%.

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Rates that high could cause a consumer to end up paying for the items they bought on credit several times over in interest if they carry a balance.

“Store credit cards probably account for most of the credit problems our clients are struggling with,” said Heather Murray, manager of community relations at South Side-based Advantage Credit Counseling.

“It’s very rare to see an interest rate lower than the mid-20s for store cards,” she said. “It’s pretty difficult to get out of that.”

Once a consumer spends up to the limit on the card, she said retailers will increase the credit limit to give the customer some breathing room. “But it really gets you to spend more money, and then you are in worse trouble than before.”

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Some of the most expensive store cards are issued by retailers such as Big Lots, Discount Tire, Jared The Galleria of Jewelry, Kay Jewelers, Lane Bryant, Williams-Sonoma, Dick’s Sporting Goods and Staples.

Interest rates have fallen significantly in recent years to record low levels for home mortgages and auto loans as the Federal Reserve has steadily cut the rate banks pay to borrow money to nearly zero percent.

But financial institutions that are able to access money at near zero percent interest have not been as quick to lower the rate they charge credit card users.

“These 30% rates on store credit cards is the same as the penalty rate on most credit cards if you miss a payment and go 60 days or more late,” said Ted Rossman, an industry analyst at CreditCards.com.

“So, it really just puts context around how high a 30% APR is,” he said. 

‘Store cards don’t discriminate’

Retail credit cards are in a class of their own for the way they require all customers to pay the same interest rate.

Retailers that set a 29.99% rate for their store cards will charge that same rate to all customers who use the card whether they have good, average or bad credit.

“Store cards don’t discriminate,” Mr. Rossman said. “They just give a bad rate to everybody.”

There are about 392 million store credit cards in circulation in the United States right now, according to research by an online personal finance website called The Ascent, which recently analyzed credit and debit card market share.

Store credit cards represent almost 35% of the total 1.12 billion credit cards in the country.

The average American holds four credit cards, according to CardRates.com.

Regular credit cards issued by Visa, MasterCard and other major banks typically set the interest rate they charge customers based on the customer’s credit score.

Mr. Rossman said the national average that banks charge credit card customers is about 20%. Customers with good credit can get rates as low as 16%. People with bad credit will pay around 24% to use a regular credit card.

Chris McConnell, president of credit education at CureMyScore.com based in Carnegie, said while consumers can’t always control the interest rates that card companies charge, they can always avoid paying any interest by paying the bill in full each month.

“If you get an $800 bill for Christmas shopping, you’ll pay no interest if you pay it off,” he said. “Think of how many people are still paying for Christmas 2019 on credit cards they are carrying balances on.

“The reason retailers want to offer you their store cards is so that you can charge more merchandise that you don’t have cash on hand to pay for,” Mr. McConnell said. “And if you don’t pay off the balance, they can start charging you interest.”

‘It’s usually an impulse decision’

If sky-high interest rates aren’t bad enough, store credit cards also can affect people’s credit score.

The lender will have to do a hard inquiry on the customer’s credit report at the time they apply for the store card. That alone will knock a person’s score down a few points.

It shouldn’t be a big problem as long as the customer is approved for the card. But those points will add up if someone decides to accept several store card offers over a short period of time, which is why it’s a good idea to wait about six months in between card applications, according to credit experts.

Store cards usually have low credit limits of $500 or $1,000 in many cases, which means if someone charges $300 worth of merchandise, the card balance will already be at or beyond the 30% credit utilization ratio.

That’s important because credit bureaus start penalizing cardholders once their utilization goes beyond 30% on any individual card.

Cardholders with a $10,000 credit limit won’t start losing points on their credit score until they spend more than $3,000. Store cards won’t usually offer a limit that high.

Lauren Saunders, associate director of the National Consumer Law Center in Washington, D.C., said part of the reason credit card companies have not lowered the rates they charge consumers is because they don’t have to.

The other reason that financial institutions choose to keep their rates on credit cards so high is to cover losses that occur when people don’t pay back the debt. Unlike real estate and automobiles, which can be repossessed by lenders, credit card debt is not secured by any asset the lender can take back.

Ms. Saunders said store credit cards can be problematic for some consumers because it’s usually an impulse decision to apply for them without being informed about them.

“Stores realize when you are standing in line to get a purchase and you get a discount, you don’t take the time to read over the pricing as you would with another credit card,” she said.

Tim Grant: tgrant@post-gazette.com or 412-263-1591.

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First Published: November 9, 2020, 1:35 p.m.

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In this Tuesday, Nov. 15, 2011, file photo, customers enter Staples office supply store in Miami. Some of the most expensive store cards are issued by retailers such as Big Lots, Discount Tire, Jared The Galleria of Jewelry, Kay Jewelers, Lane Bryant, Williams-Sonoma, Dick’s Sporting Goods and Staples.  (Lynne Sladky/Associated Press)
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