Do you know why you shouldn't apply for store credit cards?
Why Store Credit Cards Are Bad for You
by Bill Hardekopf
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We've all been tempted by the immediate benefit to save 10% or maybe even 15% on your current purchase when you apply for the store's credit card. But this is not a wise financial move for most consumers.
Most retail stores offer credit cards with interest rates between 23% and 30%, much higher than bank-branded credit cards. Some cards, such as the Napa Auto Care Easy Pay and the Lane Home Furnishings Credit Card, are charging a jaw-dropping rate of interest on credit card purchases. Other store charge cards have from 24.50% to 28.99% APR.
Retail cards, also known as private label credit cards, carry higher interest rates than bank-branded cards because they tend to be held by riskier borrowers with fewer credit options. Issuers suffered significant losses on these private label cards during the financial crash of 2008. In fact, General Electric and Citigroup, two of the largest issuers of private label cards, indicated that they wanted to sell off their private label business, but both failed to find a buyer.
Default rates have dropped significantly and private label cards with high rates are more appealing for banks and issuers that need the revenue.
There are plenty of reasons to avoid these retail credit cards:
- Extraordinarily high interest rates applies to every applicant, no matter your credit score. If you use the card to pay for a purchase and know you can't pay it off right away, you should add in the cost of your interest penalties to the price of your purchase. If your interest rate is 29.99% on a card with a $500 balance and you just make the $20 minimum monthly payment, it will take three years to pay off your balance and you will pay $295 in interest payments. Instead of paying $500 for the purchase, you are paying almost $800.
- Retail cards can pull down your credit score. Retail cards usually have low credit limits since merchants want to minimize their financial risk. If you carry a balance, this will increase your credit-utilization ratio, which is an important factor in your credit score.
- If you apply for multiple retail cards, this can also pull down your credit score for two reasons. Opening these store accounts will lower the average age of the cards in your credit history, and the length of credit history accounts for 15% of your credit score. Secondly, every time you apply for a card, the issuer may pull your credit score, which is a "credit inquiry." Too many credit inquiries can lower your credit score.
Bill Hardekopf is CEO of LowCards.com, a site that 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.
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