If you’re doing any of your holiday shopping in person this year, you may be asked if you’d like to sign up for a store credit card at checkout.
It’s a tempting offer. You can generally apply right there at the register, and doing so often means a sizeable discount on your purchase. But before signing anything, make sure you know exactly what kind of deal you’re getting, says Ted Rossman, a senior industry analyst at Bankrate who focuses on the credit industry.
“It’s definitely a big buyer beware,” he says. “A lot of us are going to be offered these at the checkout counter this holiday season. The fourth quarter is when most of these retail card signups take place.”
Some retailers entice consumers to sign up by offering an interest-free grace period — with a big catch. Some 80% of store cards with 0% APR offers come with what’s known as “deferred interest,” according to a recent study from WalletHub. Essentially, if you carry any balance at the time your grace period expires, you’re retroactively charged for all of the interest that would have accumulated.
“Deferred interest is a really nasty gotcha, because a lot of people don’t understand what it means,” says Rossman. If you don’t know the rules, it can end up costing you far more than whatever you saved on that initial purchase, he says.
“It can be a huge sum, especially if we’re talking about big-ticket items,” Rossman says.
What to know about deferred interest
As an enticement to sign up and make a purchase with the store card, some retailers make an introductory offer of 0% APR, typically for a period of six months to two years.
But if you receive such an offer, be sure to read the fine print, says Rossman.
There are a few key terms to look out for, Rossman says. The most common are “deferred interest,” “no interest if paid in full” and “special financing.”
They all mean the same thing: If you run a balance on the card, it must be completely paid off by the end of the introductory period. If not, you’re charged retroactively for what you would have owed in interest for each month you owned the card.
Retailers argue that such cards can benefit consumers who use them responsibly.
“With any financial product or credit offering, it’s essential to read the terms and conditions,” says Dylan Jeon, senior director of government relations at the National Retail Federation. “We view these as customer-friendly programs that allow people to make purchases maybe they otherwise wouldn’t be able to with usual credit cards.”
Still, the retroactive interest makes the retail cards that offer these interest rate terms different — and potentially more destructive — than bank-backed cards which offer 0% introductory periods, says Rossman.
With bank-backed cards, “if you have anything left at the end of the term, then they charge you moving forward, but they don’t go back,” says Rossman. If you’re looking for financial flexibility to carry a balance on big-ticket items this holiday season, these are probably safer than deferred-interest cards, he says.
If you do opt for a store card with deferred interest, do so with a plan to pay it off in full before time runs out. A common strategy for any card with an introductory period involves taking your balance, dividing it by the number of months in your term and making consistent payments.
Rossman suggests taking one additional step: If it’s a 12-month offer, pretend it’s an 11-month offer.
“One safe way to do it would be to try to pay it off at least a month early and try to have that last statement show a zero,” he says. “That way there are no miscalculations or rounding errors. There’s no wiggle room.”
Other drawbacks of store cards
In general, store cards aren’t a great idea for people who tend to carry a credit card balance, says Chip Lupo, a writer and analyst at WalletHub. “They tend to come with very high interest rates,” he says.
The average retail card comes with an APR north of 30%, according to Bankrate — 10 percentage points higher than the rate on the average credit card.
Plus, credit limits on store cards tend to be low, Lupo says, “which can make it easy to max out the card on one shopping trip — that can hurt your credit score.”
These may not be dealbreakers for shoppers who are diligent about paying down their cards. A quarter of store cards offer some form of rewards, usually in the form of points, according to WalletHub. Getting cash back for shopping at your favorite stores isn’t necessarily a bad idea, says Rossman.
“There’s the everyday use case that if you are loyal to a store and you like getting 5% back every time you buy from [your favorite stores] with their card, that can work,” he says. “It’s just predicated on paying it off before the interest hits.”
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