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Store-Branded Credit Cards: More Dangerous Than You May Think

By Selena Maranjian - Updated Jun 25, 2018 at 10:36AM

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Beware of surprisingly high interest rates and the sneaky practice of charging "deferred interest."

Credit cards are a great convenience. As long as you have enough discipline to not rack up high-interest rate debt with them, they can make your financial life easier, allowing you to pay for just about anything at any time, without carrying wads of cash in your wallet.

Store-branded credit cards can seem like another great thing, as they often offer special perks and benefits. They have a dark side, though -- and few people seem to realize it.

young woman holding credit card in one hand while looking at smartphone with an astonished expression

Image source: Getty Images.

The benefits of store-branded credit cards

First, though, let's concede that there are upsides to using store-branded credit cards. The following table will give you an idea of the kinds of discounts you can get:

Retailer

At the Store (or Its Website)

Other Benefits

Amazon.com

Up to 5% back depending on the card you get

2% back at restaurants, gas stations and drugstores, and 1% back on other purchases

Costco 

2% cash back

4% back on gas, 3% at restaurants and some travel, 1% on everything else

Target 

5% savings

Longer return period and free shipping at target.com

Wal-Mart 

3% savings at Walmart.com

2% back on gas at Walmart and Murphy USA stations, 1% back at Walmart stores and everywhere else

Data source: consumerreports.com. 

(Don't sign up for any of the aforementioned cards without checking the fine print first, though -- terms can change over time. There are limits to some of the cash-back offers, too.)

yellow tape with the word warning printed on it repeatedly, criss-crossed

Image source: Getty Images.

The dangers of store-branded credit cards

So with all that's good about store-branded credit cards, what's the downside? Well, for starters, they tend to have higher interest rates than regular credit cards, and that can be disastrous, if you rack up debt on them. For example, if you manage to owe $3,000 on a card that's charging you 20%, and you only make 4% minimum payments on it, it will take you 10 years to pay it off, and you'll be paying a total of about $5,000. Some store credit cards sport interest rates near 30% -- paying off that $3,000 at 28% interest will take you more than 13 years and cost you nearly $7,000.

It gets worse, too -- because many store-branded credit cards offer you the ability to buy things for "zero interest" if you pay it back within a certain period. That may sound terrific, but it's likely to be a "deferred interest" scenario, which can be very costly. Imagine, for example, that you buy a $1,600 large-screen television and pay off $1,500 of it within the zero-interest period. You might expect to be charged interest on the remaining $100, but many cards will instead charge that interest on the entire $1,600. That could cost you several hundred dollars.

Shoppers in danger

Unfortunately, many consumers seem to know very little about store-branded credit cards, as is evident from a recent survey conducted by LendEDU. It found that:

  • 44.6% don't know the interest rate on their store-branded cards.
  • 65.2% regularly carry a balance on their store-branded cards.
  • 41.3% spend extra just to reach a spending threshold for a discount.
  • 67.75% had multiple store-branded credit cards.

If you have or are thinking of getting any store-branded credit cards, be sure you understand the terms involved, and keep your spending in check.

signpost with three signs on it, labeled good, better, and best

Image source: Getty Images.

What the best credit cards look like

When evaluating store-branded credit cards -- or any credit cards -- favor those with attractive features. Here are some features of the best credit cards:

  • No annual fee. Most credit cards don't charge an annual fee. Note, though, that if a card charges, say, $99 per year, and will deliver, say, $300 or more in value, then the fee can be worth it.

  • No penalty APR. A penalty APR is what you get when card companies raise your interest rate, often to close to 30%, if you're late paying a bill. Look in a card's fine print to see whether there's a penalty APR, and perhaps avoid the card if it's there. Plenty of cards don't have this feature.

  • Low interest rates. If there's a chance you will occasionally be carrying a balance, you should favor cards with a relatively low interest-rate range.

  • Other fees: Find out what fees a card will charge you -- such as for paying your bill by phone, getting a cash advance, being late with a payment, exceeding your credit limit, and so on. Think about what services and/or fees might apply to you and what the card might cost you.

A last danger related to every kind of credit card is that they can lead you to spend more than you initially planned to. Fight such urges and stick to your plans while respecting your budget. Abusing credit cards can sink your credit score and lead to further financial headaches. 

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