Buyer Beware: Before Applying for a Store Credit Card, Here Are 9 Things You Need to Know

Buyer Beware: Before Applying for a Store Credit Card, Here Are 9 Things You Need to Know

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[Editorial note: The evaluations of financial products in this article are independently determined by Wirecutter and have not been reviewed, approved, or otherwise endorsed by any third party.]


We don’t want to say that you should skip store credit cards entirely. They can be a good way to build credit. And for cardholders who pay their bills in full each month, and shop at those stores frequently enough to take advantage of the perks, retail cards can be a great way to get big savings, status, and benefits like free shipping.

But before you get any retail card, here are some red flags you need to be aware of.

1. High APRs

Interest rates on retail credit cards are usually higher than those on general-purpose credit cards. In 2018, the average APR for general-purpose cards was 20.3%. For retail cards, it was 26.4%, according to the Consumer Financial Protection Bureau’s 2019 Consumer Credit Card Market Report (PDF). If you carry a balance, interest charges can quickly snowball.

Let’s assume you have a $1,000 charge on your credit card, and that you intend to make monthly payments of $100. Here’s what that looks like on cards with two different APRs:

A $1,000 charge paid off in $100 installments APR Amount you pay in interest
General-purpose card 20.3% $104.80
Retail card 26.4% $142.01
Difference in interest charges $37.21 (that’s 36% more)

The bigger your debt, the more you pay in interest. Carrying a balance is normal: 27% of Americans in late 2017 reported carrying a balance on their credit cards most or all of the time, according to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2017 (PDF).

But if you do anticipate carrying a balance (and remember, it’s a myth that you need to carry a balance in order to build credit), stay away from cards with high APRs, which includes most retail cards.

2. Low credit lines

Your credit line is the amount of money your bank lets you borrow at any given time. The average credit line for people with prime credit scores (between 660 and 719) across general-purpose cards was $4,440 in 2018, according to CFPB data, compared with credit lines of about half that for retail cards.

A bar chart showing the average credit line on new general purpose accounts

It’s a similar story for people with near-prime credit scores (between 620 and 659). While they had average credit lines of about $2,000 on general-purpose cards in 2018, their credit limits on retail cards were roughly 50% lower.

A bar chart showing the average credit line on new private label accounts

A low credit limit may be problematic for your credit scores because it can increase your chances of using most or all of your available credit. Experts recommend that you keep your credit utilization (the total of how much you currently owe across all of your cards divided by the total amount of your credit limit, expressed as a percentage) at no more than 30%. This applies to both your total credit limit and an individual card’s limit. So if you use your retail card with a $1,000 credit limit to buy an $800 sofa, your utilization ratio on that card is 80%, which can negatively affect your credit scores.

3. Higher fees

Store cards tend to have more fees than general-purpose cards. At the end of 2018, fees comprised 2.2% of balances on traditional credit cards, compared with 5.8% of balances on retail cards, according to the CFPB.

We’ve seen fees to pay by phone, to get your statement printed, for exceeding your credit limit (which is easier to do if your credit limit is already low), and more. For example, the Express Next Credit Card (which we still recommend, with heavy caveats around its fees), charges you up to $15 if you choose to make an expedited payment over the phone.

4. Bad “special financing” deferred-interest promos

Deferred-interest offers are easy to mix up with 0% purchase APR offers, which charge interest on your remaining balance when the promotional period ends. But with deferred-interest offers, if you don’t pay off your balance by the end of the promo period, you’re charged interest on the entire purchase.

Many of our picks advertise a “special financing” offer as one of their benefits. That’s another way of describing a deferred-interest offer. While we still recommend cards with deferred-interest promos, in almost all situations, you should stay away from that financing option.

5. Poor customer service

Retail credit cards are notorious for providing bad customer service. Common complaints include unexpected fees and interest, trouble closing accounts, and problems with a purchase on a statement (such as disputing a fraudulent charge).

Alliance Data Card Services is the parent company of Comenity Bank, which issues an enormous amount of store credit cards (including many of our picks, such as the Express Next Credit Card, the Pottery Barn Credit Card, and the Williams Sonoma Visa Credit Card). According to a CreditCards.com analysis of the 22,500 complaints filed in 2017, Alliance came in the top spot for the number of complaints relative to the size of its card business.

Issuing bank Examples of cards it issues Complaints per $100
million in credit card
balances
Alliance Data Card Services (Comenity Bank) Express Next Credit Card, Pottery Barn Credit Card, Williams Sonoma Visa Credit Card 6.35
Barclays Bank Delaware Barnes & Noble Mastercard, JetBlue Plus Card, Hawaiian Airlines World Elite Mastercard 3.74
Synchrony Financial GapCard, Sam’s Club Mastercard, AEO Connected Visa Credit Card 3.34
U.S. Bank U.S. Bank Cash+ Visa Signature Card 3.12
American Express The Platinum Card, American Express Gold Card 2.98
Capital One Capital One Walmart Rewards Card 2.89
TD Bank Nordstrom Visa Signature credit card, Target RedCard Credit Card 2.88
Data is based on a CreditCards.com report analyzing CFPB complaint records from 2017.

Synchrony Financial, which also issues a number of store cards, came in at number three in the CreditCards.com analysis, with 3.34 complaints per $100 million in credit card balances. We recommend Synchrony cards—including the AEO Connected Visa Credit Card, the Sam’s Club Mastercard, and the GapCard—in our guide to the best store credit cards.

No card issuer is immune from complaints. Even banks that typically perform well in customer service metrics, like American Express, have their share. And for what it’s worth, we’ve talked to people who have had issues with an Amex-issued card but not with their Synchrony-issued GapCard. Still, those numbers should give you pause.

Read your card’s terms and conditions before applying, review your statement each month to catch potential errors before they grow more problematic, and save your receipts in case you need to dispute a charge.

6. Trouble getting help from a human

In the same vein as frequent customer service complaints, holding a card issued by a company like Synchrony or Comenity can mean it’s harder to get in touch with a human in the first place.

Maybe you lost your wallet. Now in a panic, you want to speak to a customer service rep face-to-face rather than simmer in rage as you listen to hold music. Most big banks have brick-and-mortar branches where you can get in-person help. But the Gap clerk likely can’t help you with your GapCard troubles, which means you have to take the less-than-ideal route of calling customer service for support. (Though, for what it’s worth, Discover Bank has limited physical locations yet consistently earns high customer satisfaction ratings.)

7. Limited technology

Most major general-purpose credit cards are compatible with digital wallet apps like Apple Pay, which can make the checkout process more efficient (not to mention more secure). Store cards, though, don’t always have the same capability.

We found some retail cards that are mobile-payment-friendly but still aren’t compatible with Apple Pay or Google Pay. For example, while Target accepts contactless payments, the Target RedCard Credit Card itself can’t be added to digital wallets like Apple Pay or Google Pay. You have to pay with the RedCard through the Target app, which means one more app to download and another (somewhat confusing) interface to navigate.

8. Irregular billing

If you have an everyday-spending credit card, you’re likely using it, well, every day. You probably get a bill around the same time each month, and ideally, you pay it off in full all (or most) of the time. You might set it to autopay, or perhaps you’ve built a process for making manual payments into your monthly routine. Either way, paying off your general-purpose credit card is likely a habit.

With store cards, on the other hand, you won’t necessarily get a bill each month, and you may be less likely to account for that spending in your budget.

If your Express credit card bill arrives in your mailbox only a few times a year rather than every month, paying it off is probably not a habit. One Wirecutter staff member accidentally threw away her GapCard bill because she thought it was junk mail. This led to a missed payment, a late-payment fee, and interest charges that exceeded the rewards she had accrued through the year.

While setting up autopay can help you avoid missing payments, some financial experts—including Amy Bucher, the vice president of Behavior Change Design at design consultancy group Mad*Pow—caution against it for folks who may be concerned about having enough money in their checking account to cover those payments.

“I don’t like autopay, particularly for spending that varies month to month,” Bucher said. “I don’t want money coming out of my checking account that I haven’t accounted for.”

That especially rings true for retail purchases, which may not be part of your monthly budget but could comprise a big chunk of your spending in some months, such as during back-to-school season or the holidays.

For people who opt to skip autopay, Beverly Harzog, a credit card expert and consumer finance analyst for U.S. News & World Report, recommends setting recurring calendar reminders or putting a note in your paper planner to check your credit card statement each month.

If you think there’s a chance you might make an honest mistake—like missing a payment on a card you don’t often think about—skip the store card in favor of paying with cash, a debit card, or a general-purpose credit card that you use and pay off regularly.

9. Temptation to overspend

We’ve found that instead of saving you money, the complicated rewards structures on many retail cards often tempt shoppers to spend more than they might have intended.

Some retail cards offer discounts, like 35% off a purchase, as opposed to rewards certificates based on how much you spend (for instance, you get $20 in Nordstrom Notes for every 2,000 points you earn with the Nordstrom Visa Signature credit card). A $20 rewards certificate is a finite amount; no matter what you buy, your order total will be $20 cheaper. But you might be compelled to spend more money with cards that provide ongoing discounts in lieu of traditional rewards.

“It’s easy for people to fall for the ‘the more you buy, the more you save’ message, because it’s technically true,” said Derek Hagen, CFP, the founder of financial therapy and consulting firm Money Health Solutions. “The trick is that we end up focusing on the savings rather than the expense, which is the wrong reference point.”

Hagen illuminates this type of thinking with an example: You plan to buy $50 shoes at Kohl’s, but because you have a 35% off coupon, you feel compelled to take advantage of “bigger savings” by buying $100 shoes instead.

“The person wanted $50 shoes and could have gotten them for $32.50,” Hagen said. “Instead, because the buyer was focused on the savings rather than the expense, they ended up paying $65 [for the $100 shoes after the discount], or $15 more than originally budgeted.”

Expiration dates on rewards certificates may also push you to buy things you don’t need. One Wirecutter staffer we talked to said that while she mostly likes her Old Navy Visa Credit Card, the rewards stress her out. Here’s why:

  • Points expire after two years of card inactivity. That isn’t necessarily a problem for her, since she buys almost all of her clothes at Old Navy.
  • Old Navy rewards certificates have short expiration dates (typically one month from the issue date). Accruing 500 points with the Old Navy credit card nets her a $5 rewards certificate, but with only one month to spend it, she often finds herself buying something just for the sake of using the reward.

“We fall for expiration dates on sales because it taps into our natural fear of missing out,” Hagen said. “It’s one thing if we were going to buy something already and this discount helps us get it for less money, but typically we end up telling ourselves that we don’t want to miss out on the sale. So we buy something we weren’t going to buy, thus spending more money than we intended.”

Sources

  1. Derek Hagen, CFP, founder of financial therapy and consulting firm Money Health Solutions, phone interview, March 7, 2020
  2. Amy Bucher, vice president of Behavior Change Design at Mad*Pow, email interview, March 6, 2020
  3. Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report, email interview, March 7, 2020

Source: NY Times – Wirecutter
Keyword: Buyer Beware: Before Applying for a Store Credit Card, Here Are 9 Things You Need to Know

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