Have you noticed how stores are pushing a lot more than just their usual merchandise this holiday season? I have, especially when I’ve tried to buy something with my Visa, MasterCard, Discover or American Express card instead of the store’s own card.
In almost every case, the sales associate has urged me to sign up for the retailer’s card, saying I could save 10 percent on my current transaction if I did. Several times, the clerks asked if I was sure I didn’t want a store card. Some upped the ante, saying I’d earn another 10 percent off on my next transaction for signing up.
Harder Sells for Store Cards
I’ve been solicited in the past, but this year the spiel has been particularly aggressive. (Some associates get $10 for every new account they sign up).
(MORE: Dealing With Massive Credit Card Bills)
Gerri Detweiler director of consumer education for Credit.com, told me she’s experienced this hard sell, too. One clerk, she said, “wouldn’t stop pushing me to sign up for the store’s card. She must have asked me at least eight times.”
What should you do if this happens to you? (And it surely will.)
I’ll run through the pros and cons of store cards momentarily, but first a little context.
Why Stores are Pushing Credit Cards
Stores are definitely pushing customers to open new accounts, said Robert Hammer, head of the R.K. Hammer, a bank card advisory firm based in Thousand Oaks, Calif. Three reasons:
First and foremost, they’re profitable for the retailers because the cards’ often charge interest rates of 20 percent or more. Second, cardholders tend to be more loyal customers, an essential ingredient for success in a competitive shopping environment. And third, stores can more easily track buying habits if customers use the branded cards.
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It’s no surprise, then, that a new report by the credit bureau Equifax found the total number of store-issued cards just hit a four-year high of 183 million, the most since September 2009. In the first eight months of this year, 24.6 million new store cards were distributed, up 11.6 percent over the same period last year.
Whether you should join that massive club depends on the terms, potential discounts and — most important — your credit needs in the near future. Let me spell things out for you.
(MORE: How to Improve Your Credit History and Pay Less for Loans)
4 Benefits of Store Cards
1. Potentially big savings. You could earn a substantial discount off your current purchase, often 10 to 20 percent, by agreeing to take the card. That could save you $100 or more on, say, an expensive TV or computer. In the future, you’ll also receive percent-off coupons available only to card holders.
2. Advance-sale notices. When you own a store card, you often get notified of upcoming sales by email and snail mail. You'll also receive invitations to members-only sales events.
3. Loyalty rewards. The branded credit card may offer bonuses for being a regular customer, such as a $10 coupon for every $200 spent or 5 percent off every future purchase. Those savings can add up quickly if you use the card often.
Credit.com’s Jason Steel just cited five store cards as particularly good buys because of their rewards programs: Target’s REDcard (a Visa with a 5 percent discount on Target purchases), Gap’s Visa Card (5 percent cash back on Gap-brand purchases), Costo’s TrueEarnings Card from American Express (3 percent cash back on gasoline purchases, 2 percent on restaurants and travel), Pottery Barn (a $25 gift card for every $250 spent) and Amazon’s Rewards Visa (3 rewards points for every dollar spent at Amazon; 100 points equals $1 off). Interest rates range from 14.24 percent to 24 percent.
4. Zero-percent financing. Many stores charge no interest for 12 months or more if you use their cards to make big purchases, such as appliances and furniture. But if you don’t pay on time, the interest rates could be quite steep. (More on that shortly.)
4 Drawbacks of Store Cards
1. A negative impact on your credit score in the short run. That’s because financial institutions consider a new account as a risk. So if you plan to apply soon for a car loan or mortgage, you may want to decline the new card. Otherwise, you could face a higher interest rate on the plastic or even outright rejection when you try to borrow.
This happened to me a couple of years ago when a sales clerk persuaded me to open a store card account. As I wrote on Next Avenue, when my husband and I went to refinance our house a few months later, I learned that my impulsive act lowered my credit score by about 30 points.
Over time, however, the credit risk associated with the new card drops, assuming you pay on time. In fact, if you’re prompt, having the store card will ultimately improve your credit score.
2. Higher interest rates than other cards. Store cards tend to charge much more than Visa and MasterCards issued by banks, which these days typically levy 13 to 16 percent interest. So if you don’t plan on paying off your store card’s bill in full, the interest rate may quickly wipe out any savings you may have reaped on the initial purchase.
3. Deferred-interest traps. Zero-percent financing could be disastrous if you make a late payment or don’t pay off your bill in full by the end of the promotional period, according to CardHub.com, an online credit-card search engine.
The reason: stores will then apply the rate retroactively to the entire purchase price. Voila: you now have a deferred-interest loan. In a recent study on these loans, CardHub said many retailers “are less than upfront about the true potential costs of such plans.”
Here’s how CardHub illustrated the trap: “Suppose you open a new credit card to buy a couple of big-ticket items on your kids’ Christmas list — a laptop and a bicycle totaling $800, for example. If you choose a traditional credit card that offers 0 percent on new purchases for six months and charges a 20 percent regular interest rate and you miss your payoff goal by one month (paying off your total balance in seven months instead of six), you’ll pay $2 in interest. However, if you choose a card that offers deferred interest, you’ll not only pay 27.5 times more interest (i.e. $55), easily eradicating any Black Friday deals you might have scored, but it will also take you an additional month to become debt free.”
CardHub said the worst deals are from stores that offer deferred interest but are not transparent about their policies — a list that includes the likes of Pottery Barn, Amazon.com, Lowe’s and Macy’s. “Just make sure to read the fine print before using such a card for financing purposes,” said John Kiernan, a senior analyst at CardHub.
4. Temptation. Signing up for one or two more credit cards — especially ones loaded with coupons and rewards — might entice you to blow your budget. “The more cards you have, the greater the temptation to use them and the easier it is to lose track of them when bills are due,” said Detweiler.
That last reason is why I’m not getting any new store credit cards — unless I decide to buy a big-ticket item and the card can provide significant savings. So far, though, that’s not the case.
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