Financial expert talks about ‘profound’ impact of retail credit cards: ‘There are so many strings attached’
Nearly every store offers rewards credit cards for customers, but not all of the offers translate into big savings — and one personal finance expert warns that these offers are often a “catch-up” for long-term problems.
“For consumers, it’s a trickle effect that could last for years,” said Brian Kuderna, a financial planner and author of “What to Do with Your Money?” Fox News Digital.
“They’re like, ‘Oh, I saved $50 on that couch, I might not have really wanted in the first place,’ and look at how that impacted their financial planning. And it’s so surprising sometimes to see the origins of it. [what] Some of these issues are
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Store credit cards are similar to other “savings” ploys from retailers aimed at getting consumers to spend more to save money. Unlike other deals, such as buy-one-get-one-free sales, credit cards come with long-term financial risk.
Retailers offer consumers two card options: store cards, which are accepted only at a specific retailer or brand family, and co-branded cards, which can be used broadly. These cards are marketed to consumers primarily at the point of purchase, without the need to complete an application or visit a bank.
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The fast-selling nature of card pitches can “hook” unsuspecting consumers and create a “trickle-down” effect on their financial planning.
“Not a lot of people go to Costco or Walmart or sign up for Amazon today and try to get a new credit card,” Kuderna explains, “and then they get an alert or the cashier says, ‘Why don’t you get a store credit card? Everything you buy today is half off.’ That might sound too good to be true, and it often is.”
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Kuderna went on to explain the “serious” financial dangers of impulsively applying for retail credit cards.
“[The cards] “It may be attractive, they may involve us, but if we are unable to repay the debt, we will have to pay interest, late fees, etc.,” Kuderna stressed.
“With these point-of-purchase offers, there’s no time to do your homework,” he added. “Some people say, ‘I never intended to get a credit card, and now I’m here. How is this going to impact my budget and my credit score over the next two years?'”
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When you open a card, a credit inquiry takes the first hit to your personal credit score, which is important for purchasing power and can help you save money on payments and interest on big purchases like a home or car.
After the initial credit check, high interest rates, late fees and even inactivity clauses can repeatedly strike disaster upon consumers.
“These types of cards are not good because they often have low credit limits, which means that your utilization rate will be higher if you use them. Also, if you don’t use the card for a certain period of time, it may be closed and your credit limit may be reduced, which is also not good for your credit score,” Kuderna explained.
“The amount they end up paying in interest and late fees on a store credit card may be negligible compared to the small one-time savings they could realize by opening a credit card.”
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according to Bankrate data, Retail credit card interest rates are at a record high of 28.93% as of October 2023. Kuderna warned that high rates can make it difficult for shoppers to make the most of their card’s rewards, leading to customers paying more in interest than they’ve saved.
“You just have to do the math to see how advantageous this is for issuers, credit card companies and retailers.” – Brian Kuderna
“There can be a whole host of restrictions, including interest that will be charged, penalties that may be incurred, fine print on the card, dormancy clauses when you’re not using the card, and more.”
Retail cards also often offer incentives for younger buyers or those with poor credit to get a new credit card.Subprime mortgages, also known as predatory lending, can be a big opportunity, but it’s also an aspect consumers need to be “very careful about,” Kuderna said.
Financial planner Brian Kuderna outlined the serious financial dangers associated with many retail credit cards. (Getty Images/Fox News Digital)
“Spaving” offers also work similarly to subscription models: if retailers can “hook” customers with a store card, it can generate repeat business, potentially increasing the retailer’s profits, and it also forces consumers to make “tough choices” about their finances.
“We’re doing all this and that just for the instant gratification of a first-time offer, but again, there are long-term effects — you don’t notice them right away, but there are effects. And coupled with other department stores and other online retailers, it can really create chaos, even if people don’t intend to come there,” Kuderna explained.
While there are “significant” pitfalls to opening a retail card, Kuderna said credit cards “can be a win-win, but it’s something that needs to be looked at closely.”
Kuderna urged consumers looking to open a store card to evaluate the type of card they’re applying for and whether the retailer is a place they shop “frequently.” Additionally, consumers who apply for a card should practice paying off the balance right away.
Other tips include treating retail cards like traditional credit cards, practicing good budgeting, and avoid taking on more debt than you can repay.
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