Holiday shopping can be stressful, and many consumers look for any opportunity to save money during this time of year. This may be why retail credit cards are so enticing -- they often offer 10 to 20 percent off your first purchase if you apply and get the card, which can be tempting when you're standing in line with a full basket.
The savings are real, but it's important to consider more than the one-time discount you'll receive. Weigh these pros and cons before applying for a retail card -- you may be better off looking for a coupon elsewhere and paying with a general rewards credit card, debit card or cash.
Pros of retail cards.
- Discounts and special offers. When holiday shopping, you can use the initial discount many stores offer when you sign up for a retail credit card to make large gift purchases. You may also be eligible for ongoing discounts and offers as a cardholder. For example, the Victoria's Secret card comes with free shipping on all orders, and Lowe's cardholders can choose between 5 percent off select purchases or a zero-interest financing offer.
- Easier access to credit. It may be easier to get approved for a retail card than a standard credit card. If you don't have all the money you'd like to buy gifts and decorations during the holidays, making some purchase on credit and paying the bill later could make the holidays more cheerful. Plan your spending with upcoming paychecks or a holiday bonus in mind. Ideally, you want to pay the statement balance in full when it's due.
- They can help build credit. You may be able to use a retail card to build or rebuild credit. Whitney Lee, associate private CFO for oXYGen Financial in Alpharetta, Georgia says, "If you haven't established credit yet, (retail cards) may be a great opportunity for you to start building credit. The problem is that they have considerably high interest rates, so don't allow yourself to carry a balance." To build credit responsibly, try to pay the balance in full and on time each month and try to keep the balance below 30 percent of the card's credit limit.
Cons of retail cards.
- Higher interest rates. Retail cards tend to have higher interest rates than standard credit cards, which could offset any potential discounts or rewards if you hold a balance. In 2015, the average interest rate on retail cards was a little over 23 percent. As of November 2015, the average rate on all credit cards is about 15 percent.
- Less versatility. Retail cards typically only work at the associated store, which may make gift shopping for multiple people difficult. However, some stores now also offer co-branded credit cards with a network such as Visa or MasterCard. These can be used anywhere the associated credit network is accepted. You may need better credit to get approved for these co-branded card, though.
- Limited rewards. Retail cards often offer special perks and bonus points when you make purchases, but you must use your rewards at that particular store. A standard rewards credit card is more versatile, and some may offer similar rewards for holiday shopping.
- Lower credit limits. Your card's balance as a percentage of the card's limit - the utilization rate - is a factor most scoring models use to calculate your score. If you spend $500 on a card during the mnth and your credit limit $1,000, your utilization rate is 50 percent. However, if you spend the same amount and your credit limit is $3,000, your utilization rate drops to 17 percent. Lower utilization rate is better for your credit. Retail credit cards tend to have lower credit limits than general credit cards and as a result using a retail card to shop may have a larger impact on your credit score.
- Higher likelihood of dissatisfaction. Synchrony Financial, the issuer behind many retail store cards, was ordered to pay $225 million by the CFPB in 2014 for deceiving and discriminating against some consumers. According to analysis of Consumer Financial Protection Bureau (CFPB) data by CreditCards.com, Synchrony Financial also received relatively more complaints than other issuers in 2014.
Comparing the initial purchase with and without a store card.
Using the rounded average interest rate of 23 percent for a retail card and 15 percent for a standard credit card, we thought it'd be interesting to compare the cost of paying off a $500 purchase with monthly payments of $25.
According to this calculator, it'd take about 26 months and cost $136.64 in interest to pay off the card with a 23 percent interest rate. It'd take three fewer months and cost about half as much, $66.61, to pay off the card with a 15 percent interest rate.
A 15 percent discount on the initial purchase would only save $75, about $62 less than the interest payments on the retail card. A monthly payment of $41 is the break-even point in this example - when the savings would equal the interest payments on the retail card.
If you regularly frequent the store anyway, a retail card may be worth considering, and the introductory discount can be valuable when used for holiday shopping. However, if you're not going to use the retail card very often, it may be best to pass on one just for gift shopping.
Overall, using a retail credit card to make a purchase and pay it off over time may cost you more than the potential discounts you receive. You may still be able to save on holiday shopping without a store card by looking for discount codes and coupons before shopping and signing up for retailers' email lists. Sometimes these deals and coupons can be even more valuable than the offers that come with opening a retail card.
Retail cards may offer an enticing introductory discount and ongoing rewards, but compared to a standard credit card there are more cons than pros. Look for coupons and deals elsewhere as they're especially prevalent during the holiday shopping season. Consider shopping with a standard rewards card that offers versatility when redeeming rewards, may have lower interest rates and gives rewards for purchases at any store. If you're unable to get a rewards card, a retail card may be a good way to start building credit, but try to follow the guidelines to building credit responsibly.
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