After a 15-minute wait, you finally reach the cash register at the department store with your haul of holiday gifts. You drop the armload of presents onto the counter in relief, and then you hear those magic words from the cashier: “Would you like to save 20% on your purchase today with our credit card?”
While your instinct may be to take the offer and save money in a time when many Americans are tightening their financial belts, store credit cards are nuanced financial products that even personal finance experts have conflicting opinions about.
But, when used correctly, said Clay Cary, senior trends analyst at discount site CouponFollow, store credit cards can work well.
“If you plan to use a store credit card, consider it more as a tool for budgeting rather than an extension of your spending capability,” Cary told The Independent in an email.
“Set a holiday budget, keep track of every purchase, and try to avoid carrying a balance whenever possible. Use the rewards and discounts to your advantage, but ensure the card supports your financial plan rather than working against it.”
What to watch for when considering a store credit card
Store credit cards may seem like regular credit cards, but they have two key differences: annual percentage rate (APR) and deferred interest.
APR: Check the fine print for high rates
In general, store credit cards have a higher APR than non-store cards. For example, the Chase Freedom Unlimited credit card, a popular card for those who like to earn cash back and other rewards, has an APR that ranges from 18.49 percent to 27.99 percent, depending on multiple factors such as your creditworthiness. The Target Circle Card, which you can use anywhere Mastercard is accepted, has a single APR: 28.45 percent.
The nearly 10-percentage-point difference between the Chase and Target cards’ best rates can have a significant impact on your balance. If you bought $3,000 in gifts and paid them back over one year at each card’s best interest rate, you’d pay $482 in interest with your Target card, and $308 in interest with your Chase card.
Deferred interest: Timely payoff is critical
In the credit card world, issuers often pitch 0 percent offers that last anywhere from six to 15 months or more. During the promotional period, any balance you carry doesn’t build interest. Once the promo period is over, your card’s interest rate kicks in and applies to your current balance.
Store credit cards make the same pitch, but with key distinctions. Their low- or no-interest offers are often based on deferred interest and are pitched as a way to pay for a big purchase at the time you open the card. During the promo period, you won’t pay any interest on that purchase.
Once the promo period ends, though, your balance could skyrocket unless you’ve paid off your entire balance.
Why? Because deferred interest charges you interest on the entire amount of your original purchase rather than the balance you have at the end of your promo period, even if you’ve paid down all but $5 or $10 of your balance.
“If even one dollar remains after the promotional period, all accrued interest is added at once,” Cary said.
Because the penalty for not paying off a deferred interest offer is expensive, store credit cards may not be the best idea if your finances are in flux, certified financial education instructor (CFEI) Ashley Donohoe told The Independent by email.
“If someone needs to make a large essential purchase and is certain they'll pay the balance off early, deferred-interest offers can be worth it for all the interest savings,” she said. “However, if they’re already financially unstable, taking advantage of these offers isn’t wise since there’s also the risk of missed payments on top of the interest.”
How to take advantage of store credit cards and avoid high APRs and deferred interest
While store credit cards have their drawbacks, some of them provide great rewards for shoppers who are loyal to certain store brands. Cardholders often get a wide range of perks other shoppers may not get, Cary said.
“If you shop with a retailer frequently, those perks can stack up fast,” he said. “Store cards often offer exclusive coupons, early sale access, and higher reward rates than general credit cards, so loyal shoppers can stretch their dollars further during the holidays.”
The quickest way to negate some or all of those perks is to not pay off your card each month, which allows high APRs to ply their costly trade on your balance.
That’s why Donohoe, who enjoys using her Kohl’s credit card, said discipline is the key to getting the most you can out of your store credit card.
“I recommend that [shoppers] only use their store credit card for purchases they already intended to make and not get tempted into overspending for the discounts,” she said. “Also, paying in full each month is best, but if someone is taking advantage of a financing offer, they should repay the balance before the end date to avoid potentially costly interest.”
How to balance your holiday spending when times are tight
Reese Witherspoon offers powerful financial independence advice for women
Black Friday online spending, AI shopping reach new heights
Nearly 80 percent of shoppers want to do all their spending at small businesses
Powerball jackpot soars to $820M ahead of Saturday’s lotto drawing
