Things to Consider Before Signing Up for Store Credit Cards This Holiday Season

If you’re shopping in stores this holiday season, you might find yourself being asked about signing up for a store credit card at checkout. It’s quite an enticing offer. Typically, you can apply right there at the register, and it often comes with a substantial discount on your purchase. However, it’s crucial to be fully aware of what you’re signing up for, according to Ted Rothman, a senior analyst at Bankrate who focuses on credit-related matters.

“It’s definitely a major decision, so proceed with caution,” he advises. “This holiday season, many of us will encounter these offers at checkout. Most of the retail card applications will happen in the final quarter of the year.”

Some retailers entice shoppers with interest-free grace periods, which can be quite beneficial. Yet, research indicates that around 80% of store cards offering a 0% interest rate actually come with “deferred interest.” In simpler terms, if you don’t pay off your balance within the grace period, you could be hit with retroactive interest charges for all the time you carried a balance.

“Deferred interest is a complex pitfall that a lot of people overlook,” Rothman points out. If you’re not clear on how it works, you might end up spending considerably more than you saved initially.

“This can lead to large amounts, especially with pricier items,” he added.

Understanding Deferred Interest

Store cards may provide introductory offers, showcasing 0% APR for periods ranging from 6 months to 2 years. However, it’s important to scrutinize the fine print, Rothman cautions.

There are a few key terms you should be aware of, such as “deferred interest,” “no interest if paid in full,” and “special financing.” They essentially mean that if there’s an outstanding balance on your card when the introductory period ends, you’ll backtrack to pay all accumulated interest from the previous months.

Retailers often argue that these cards can benefit consumers who manage them wisely. “Understanding the terms and conditions for financial products is critical,” says Dylan John, a senior director at the National Retail Federation. “We view these programs as supportive for customers, enabling purchases they might not manage with a regular credit card.”

That said, Rothman warns that the retroactive interest might make store cards with these offers potentially more problematic compared to traditional bank cards with 0% introductory rates.

“With bank cards, if you still have a balance at the end of the period, you might get charged, but it won’t accumulate in such a way,” Rothman explains. If you’re hoping to carry balances on larger purchases this holiday, some bank cards may prove to be safer than their retail counterparts.

Should you opt for a store card offering deferred interest, make sure to fully pay it off before the deadline. A common tactic is to take your balance and split it across the months that the offer is valid.

Rothman even recommends an additional precaution. If it’s a 12-month offer, consider planning as though it’s valid for only 11 months. “Paying it off at least a month early can ensure you see a zero balance on your final statement,” he suggests. “It minimizes the chance for any miscalculations or errors.”

Other Drawbacks of Store Cards

WalletHub analyst Chip Lupo points out that store cards are generally not ideal for those who often carry credit card balances. “They usually carry very high interest rates,” he says.

On average, retail cards have an APR of 30% or more, which is about 10 percentage points higher than standard credit card rates. Additionally, store cards often come with lower credit limits, making it easy to max out your card on a single purchase, potentially harming your credit score.

For shoppers who prefer to use cards, these issues may not be deal-breakers. WalletHub notes that about a quarter of store cards provide some kind of incentive, usually in the form of points that can be redeemed. Rothman admits earning cash back when shopping at popular stores isn’t always a bad strategy.

“For everyday purchases, there are cases where loyalty to a store can yield 5% back on each transaction. If you’re cautious with repayments, utilizing their card can be worthwhile,” he concludes.