Store issued credit cards–savings or budget busting?

During the past holiday shopping season you were probably asked several times whether you wished to open a store-issued credit card, in order to take advantage of the tempting offers of savings off your first purchase. 15% here, 20% there—the offers can be difficult to resist. But did you really save money? What are the interest rates on the cards you opened? Did you pay them off in full before the due date? Do you still use them, taking advantage of advertisings and coupons offered by the retailer?

It’s important to ask yourself whether the store-issued credit card is worth opening. Standing in line you won’t have time to read the fine print prior to signing the credit card contract. Retailers know this and count on the lure of the initial discount to attract you. Often times, store employees are given incentives for each completed credit application submitted. They are concerned with their bottom line, not yours.

Recent statistics indicate the average American consumer has 5.6 cards in his or her wallet at any given time. That’s the average American. There are now so many private label credit cards, also known as store-issued credit cards, out there it is hard to keep track. Considering that the Mall of America has over 520 stores, that’s a lot of potential debt.

THE GOOD

There are advantages to store-issued credits cards. If you have don’t have a credit background, you can build one with a low limit store card. If you anticipate a large purchase, such as a new appliance, you may be able to take advantage of perks like six months interest free financing. Paying it off within the time span means you won’t get hit with interest charges and you’ll improve your credit score.

Store-issued credit cards can be co-branded. Backed by a larger well-known company, such as MasterCard or Visa, co-branded cards usually offer a lower APR and better terms. The Federal Trade Commission defines APR as the annual percentage rate, which is a measure of the cost of credit expressed as a yearly interest rate. It’s important to note that cards with high APR essentially erase any savings you may get through in-store discounts for using the retailer’s card.

In recent years, federal regulation has been enacted to assist credit card consumers. The Credit Card Act rids prepaid gift cards and certificates of hidden fees. The act also limits interest rate hikes during the first year of opening an account—though there are exceptions.

Store-issued credit cards operate in the same way as bank-issued cards if your card is lost or stolen. You must report it immediately and you should only be liable for up to $50 in charges.

The website creditcards.com offers a tool to compare store-issued credit cards and their varying interest rates. For example, popular work wear clothier Ann Taylor offers both a co-branded card, with MasterCard, and non-cobranded card. The non-cobranded card has a 24.99% APR. Compare that rate to the co-branded card’s lower APR of 17.99 to 24.99%. Rewards associated with the card include earning 5 points for every $1 spent at Ann Taylor or Ann Taylor LOFT stores, 1 point earning on purchases elsewhere with the MasterCard, a $20 gift card for every 2000 points earned, and 15% off at sign up.

The card offered by Banana Republic is nice because it can also be used at sister stores: Gap, Old Navy, Piperlime, and Athleta. It is also offered as co-branded and non-cobranded (Visa) cards. The non-cobranded card has a 22.99% APR, while the co-branded card APR ranges from 17.24 to 20.24%.

THE BAD

A creditcards.com report on 36 store-issued credit cards pointed out that half of the cards reviewed had higher APR’s in 2010. The site offers a weekly credit card rate report noting the average APR on credit cards. Store-issued credit cards tend to have high interest rates. Considering the national average for a bank-issued credit card is a little over 14% (at the time of writing this article), your best bet may be to stay with a lower interest card.

Did you know that any credit application or inquiry affects your credit score for approximately 12 months? Inquiries remain on your credit report for 24 months. So, if you think you are saving money by opening these accounts for a few purchases—think again—because it could affect a big ticket purchase like a car or home, and cost you thousands more in interest.

The Federal Reserve offers an online pamphlet titled “Understanding Your Credit Card Offer”. It thoroughly explains credit card terms you should be familiar with. At the very least you should know the APR for purchases and the penalty APR. The penalty APR is important because there may be a number of factors where it can be triggered, such as not paying your bill on time or going over your credit limit. In addition, you should know that it will affect your bottom line for some time, typically at least six months. The Federal Reserve also offers a handy tool to help you determine how long it will take to pay off your credit card. Go to www.federalreserve.gov/creditcardcalculator and add your total balance and APR and it will calculate it for you. In addition, the Federal Reserve offers a public service announcement on their website with helpful tips on how to use your card called “Getting The Most from Your Credit Card”. The tips include:

  • Pay your credit card on time
  • Stay below your credit limit
  • Avoid unnecessary fees
  • Pay more than the minimum payment
  • Watch for changes in the terms of your account
  • The bottom line when considering a store-issued credit card is to factor in whether the card is really necessary and ask yourself the following questions:

  • Is there an annual fee?
  • What is the APR?
  • What is the grace period?
  • Doing so will save you future financial headaches.

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