Shoppers know they can find deals every week at Zales, Office Depot, Staples and Best Buy. Yet these same stores also offer some of the worst deals in the retail world — branded credit cards with annual percentage rates that exceed 25 percent.
The average rate at store-issued credit cards at the nation's largest retailers is now 23.23 percent, according to a recent survey by CreditCards.com, or 8 points higher than the national average for general-purpose cards.
Shoppers don't seem to care. Private-label retail cards accounted for about $270 billion in sales last year, according to the Federal Reserve. Many consumers take advantage of discount offers like a Macy's card that deducts 15 percent from the first purchase or a Target card with 5 percent off every purchase. Any savings quickly disappear, however, if the monthly bill isn't paid in full — Macy's charges 24.50 percent and Target 22.90 percent on unpaid balances.
"Unless you're a hardcore shopper or fan of one of these retail outlets and really take advantage of some of the rewards that are offered," says Matt Schulz, CreditCard.com's senior industry analyst, "it's hard to justify paying those sorts of rates."
With rates for borrowing money elsewhere near historic lows — a 15-year fixed-rate mortgage averages about 3.25 percent nationally — retail credit-card rates look more like an outtake from looser economic times. With the current economic market and restrictions of the Credit Card Act of 2009, retailers are turning to high-interest cards for revenue.
To attract more customers, says Schulz, retailers are making it easier to get a card.
"Sometimes they're the only card for a younger person who might just be getting started or somebody who's trying to rebuild their credit," says Schulz. "These are also instant-approval cards — you apply and find out in a minute. A lot of times issuers and retailers view those types of approvals as more of a risk, so you would see the rates higher just to hedge against that risk"
Store-only cards, also known as private-label cards, often have the highest rates. So many consumers have chosen a general-purpose card instead that only 12 of 36 retailers surveyed by CreditCards.com offer store-only cards, down from 17 in the 2010 survey. Increasingly, retailers are offering tiered cards with upgrades and other perks. Nordstrom offers rewards depending on how much a card holder spends, the lowest level up to $1,999 and the highest $10,000 or more. It also offers exclusive sales and reimbursement for alterations based amount charged.
Macy's card offers "Preferred," "Elite" and "Premier Elite" rewards based on spending amounts. More often, a retailer will issue a "co-branded" card through a bank or card network such as Visa or MasterCard. These cards have the retailer's imprint but can be used anywhere like a general-purpose card.
The 27 cards of this type in the survey averaged a lower interest rate (21.63 percent APR) than the 32 in-store-only cards (24.48 percent).Thirteen retailers in the survey also offered rates adjusted for the applicant's creditworthiness. Rates for a BJ's Wholesale Club ranged from 13.99 percent to 24.99 percent.
Retailer cards with the highest rates:
1.Zales (28.99 percent)
2.Office Depot Personal Credit (27.99)
3.Staples Personal Account (27.99)
4.My Best Buy credit card (25.24 to 27.99)
5.My Best Buy preferred credit card (25.24 to 27.99).
Retailer cards with the lowest rates:
1.OfficeMax Visa Signature (9.99 to 23.99 percent)
2.Army Air Force Exchange Military Star (10.24)
3.Nordstrom retail card (10.99 to 22.90)
4.Nordstrom Visa Signature (10.90 to 22.90)
5.Williams-Sonoma Visa Signature (13.74 to 21.74).
Anyone who carries a balance should care about rates. Let's say you have a $1,000 balance on a card with a 23 percent APR. If you make only the minimum payments each month — the interest and 1 percent of the balance — it will take 10 years, 3 months to pay it off. The interest paid, $1,262.28, will be greater than the original charge.
If that same balance, with the same minimum monthly payment, were applied to a card charging 15 percent, it would take less than nine years to pay. Interest charges would drop to $729.14. (Find out how much interest you'll pay on your card with Bankrate's Credit Card Calculator.)
Use a retailer card for the perks and pay of the balance each month. If you can't manage that, try a general-purpose card.
"It's the same, conceptually, as what people do with general-purpose cards and frequent-flyer miles," says Schulz. "If you pay your balance off [each month], you can end up getting a free trip to Paris. But if you keep spending and keep paying interest, then the numbers don't work out."