Horrifying Facts About Retail Credit Cards

Almost every time you make a purchase inside a store, you’re likely to hear something along the lines of, “Would you like to put that on our store credit card to save an extra 10% today?” Retail credit cards are popular—and they offer certain incentives that may seem worthwhile. From Best Buy to Walmart and Home Depot to Macy’s, your favorite brands are probably offering a credit card with perks tailored specifically to your tastes. Before you say “yes” to an extra $40 off your new TV or to earn 800 points towards your account, though, consider the following, less exciting risks in these offers.

Higher interest rates

Most credit cards are a form of unsecured credit. This means the balance you accumulate on your card is not “secured” by any collateral—unlike loans for your home or car, in which the lender can seize and resell your house or car if your debt goes unpaid. Because unsecured credit is riskier for lenders, credit card interest rates and fees are often higher than other types of loans.

When opening any new credit card, the interest rate is one of the most important factors to evaluate. An interest rate is the price you’re paying to borrow money, and it’s presented as a yearly percentage. This is known as the Annual Percentage Rate (APR). For most credit cards, you can avoid paying interest by ensuring that any outstanding balance is paid in full by the due date each month. If, however, you are not able to completely pay for everything you charged before the due date, then a lower APR is preferable because it means you’re paying less to borrow the money.

The average APR for general-use credit cards was 19.69% in 2020, according to research from creditcards.com, yet retail credit cards often come with rates that are significantly higher—some hovering close to 30%. 

Missing payments

If you plan to pay your balance in full before every due date, the interest rate may seem like something you don’t need to worry about—and you might be right. Getting exclusive savings, accumulating points, and earning rewards from your favorite store is great. 

Unfortunately, even the best-made plans include some risk, and it’s tough to predict when financial emergencies will occur. Car trouble, career changes, family emergencies, or even a simple mistake could suddenly result in high-interest payments and mounting debt. Each of these circumstances can change your good debt to bad debt and hurt your credit profile.

‍WalletHub reported that about 46 million Americans believed they would miss at least one credit card due date in 2020. When that happens, it can trigger other negative effects, like late fees and a lower credit score.

Finding solutions

If you already have retail credit card debt, you should talk to your lender first—Kredit can help you connect even more easily. Some topics you should cover together include:

• Debt Consolidation: This occurs when you combine multiple existing debts into a single new loan—typically with a lower interest rate. For credit card debt, this can mean consolidating your existing credit card payments into a new credit card that charges little to no interest for a certain time period, also called a balance transfer. By reducing your interest rate, every payment will directly reduce your balance faster.
• Credit Counseling: This type of guidance can cover a variety of financial topics, but is often used for advice about debt management. A debt management plan is a form of debt relief that’s personalized for your finances and is typically less drastic than other options, like debt settlement or bankruptcy.
• Debt Settlement: Negotiating a better payment plan or a reduced, lump-sum payment to settle your debt is the goal of debt settlement. This option includes some risk, such as a negatively impacted credit score, potential late fees, and more.
• Bankruptcy: Declaring bankruptcy is a legal process that can erase some or all of your debts if you qualify. It can also come with negative side effects, including a ruined credit score that remains on your credit report for up to 10 years.

Should you sign up?

A retail credit card isn’t always a bad thing—it can help you save money, earn special rewards, and build your credit if you pay off your balance in full every month. It can also make it easier to overspend, accumulate large amounts of debt quickly, and lower your credit score. It’s important to read the fine print and carefully evaluate any credit card offer before deciding on the right alternative for you.