If you're planning to finance any of your purchases this holiday season, you may be tempted to use a store credit card. These products generally offer attractive-sounding 0% interest financing, competitive rewards rates, and big discounts on your first purchase. While store credit cards can be a good idea in some cases, here's what you need to know before signing up.
Beware of 0% interest deals
There are two kinds of "no interest" financing. When you sign up for a bank credit card with a 0% introductory APR, you aren't charged any interest on your purchases until that time runs out.
On the other hand, store cards typically use "deferred interest" financing. This means that during the introductory no-interest period, interest on your purchases is accumulating, but won't be charged if you pay the balance in full before the introductory period runs out.
For example, let's say that you finance a $3,000 furniture purchase using 24-month deferred interest financing, but the store's credit card has a 27.99% standard APR. The account has minimum monthly payments of $100, so by only paying the minimum, you'd have a remaining balance of $600 once the 24-month interest-free period runs out. However, you'd also have approximately $1,000 in deferred interest charges tacked onto your 25th bill because you didn't pay the entire balance in time. Deferred interest can also be added to your bill if you make a late payment, in many circumstances.
Deferred interest offers can be great, if you're certain that you'll pay off the entire balance in time. In fact, my wife and I used a deferred interest offer like the one discussed above when we bought furniture for our home.
According to WalletHub's recent Store Card Landscape report, 100% of major store credit cards use deferred interest financing, the average length of which is 18.8 months. However, it's very important to be aware that this is not the same interest-free financing many general-use credit cards offer.
Speaking of interest...
When signing up for a store card, be sure to look at the cardholder's agreement first, specifically the section that tells you the card's interest rate.
Generally, you can expect store cards to have interest rates that are significantly higher than those of general-use credit card products. Per the aforementioned WalletHub report, the average regular APR of a store card is currently 26.72%, more than 11 percentage points above the overall national credit card average APR of 15.07%.
To be fair, not all store cards have high interest rates. The report found examples of regular APRs as low as 12.99%, but this is the exception, not the rule.
It isn't all bad
Now that we've discussed the downsides of store credit cards, it's important to mention that there are some good features as well. For starters, virtually no store credit cards (just 0.7%) charge any annual fee, while the average general-use credit card charges $16.42.
Furthermore, the rewards offered by store credit cards are simply unmatched by general-use cards. WalletHub found that the average discount rate offered by a store card that offers this type of reward is 19.27% off your initial purchase, and 2.9% off every purchase after that. In contrast, even the best general-use rewards credit cards offer a rewards rate of 2% on all purchases.
WalletHub specifically mentioned the Amazon.com, Toys R Us, TJX, Gap, and Target store cards for having exceptional reward rates (5% for all but the Toys R Us card, which earns 8%), as well as some generous initial discounts. Many stores also periodically offer exclusive discounts to cardholders, which can be another valuable perk.
While I discussed the potential pitfalls of deferred interest, it's also important to mention that intro APR periods can be significantly longer with store cards. I already pointed out that the average is 18.8 months, but there are current offers of up to seven years of deferred interest. Compare this to general-use credit cards, where a 21-month introductory period is the industry's best, and anything over one year is considered long.
The bottom line on store credit cards
Store credit cards can be great shopping tools, if they're used properly. Take advantage of the generous rewards and discounts offered, as well as extended periods of deferred-interest financing. Just be aware of the higher-than-average interest rates, and the consequences of carrying a balance past the end of your deferred-interest period.