Store credit cards are rarely a good idea for consumers. They encourage impulse shopping and also charge some of the highest interest rates of any credit cards on the market.
In a time where credit cards have become a favorite political target, New York Representative Anthony Weiner conducted a study on these store credit cards, and has now introduced legislation to increase point of purchase disclosure of interest rates, grace periods, and annual fees for store credit cards.
Weiner hopes this legislation will give consumers the information they need to make informed decisions when signing up for new credit cards.
Representative Weiner’s recent study documents the exceedingly high interest rates on retail store credit cards, some with interest rates as high as 28.99%. By matter of comparison, the average credit card interest rate this week is 13.81% according the LowCards.com Weekly Credit Card Rate Report.
The study surveyed credit cards at 35 major New York City stores and found the average rate was 23.83%, up from 21.71% in 2008. Radio Shack had the highest APR in the survey at 28.99%. Staples and Best Buy had cards with interest rates of 27.99%.
These cards may not be a good deal for shoppers but stores offer them because they generate revenue. Many times, retailers lure consumers into signing up for these cards by offering a one-time discount on that day’s purchases, immediately resulting in incremental revenue for the store.
Once consumers have that card, they are likely to use the card again and again, leading to future revenue. In addition, retailers build a valuable list of consumers who have a track record of shopping at their store. This list provides a very efficient way to promote future offers and encourage online purchases.
Mark Begor, president and chief executive of GE Capital Retail Finance and Restructuring Operations, said last week that the company plans to hold on to its $28 billion private-label credit card business.
GE is one of the few issuers of retailer credit, providing consumer credit cards for retailers such as Gap, J.C. Penney, Lowe’s, and Wal-Mart. Begor said providing credit cards for retailers is safer than the market for bank-issued cards. He said interest rates on the GE-operated cards are higher, but average balances are lower.
According to the Wall Street Journal, this means that GE makes higher margins but has less risk when consumers default. Begor also estimates that 40% of purchases at the Gap and other such retailers are made using GE-operated credit cards.
“Store credit cards are a good deal only if you can take advantage of the discount offers and pay the balance off as soon as you get the bill. A 10% discount on purchases does not justify a 28% interest rate,” said Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “We should note that there are some good store credit cards. Target’s store card offers 5% off all purchase when you use the card. That’s a good deal, but only if you completely pay off the balance each month.”
Some store cards also offer reward points with bonus points for purchases made at the store. This may sound like a good deal, but look closely at the fine print because what you earn on general purchases may be less. The average credit card offers 1 point per $1 spent. If the store card offers less than that, use a general purpose rewards card like Citi Platinum Select, Discover More, Chase Freedom, or Blue from American Express.
“Do not sign up for a credit card with each of your favorite stores.
Too many open lines of credit can hurt your credit score. Limit your total number of credit cards to two or three. But most importantly, pay off the balance in full every month on each of your credit cards,”
said Hardekopf.
Here is a link to Rep. Weiner’s report:
http://weiner.house.gov/reports/11.14.2010StoreCCRates.pdf
LowCards.com ( http://www.lowcards.com ) simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index ( http://www.lowcards.com/CreditCardIndex.aspx ) is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for over 1000 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for ten years.
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