That offer for a store credit card may sound tempting as you’re shopping this holiday season.
But you may want to think twice before you accept.
As the Federal Reserve raises interest rates, credit card annual percentage rates — a measure for the yearly cost of borrowing money — are climbing higher. That is especially true for retail credit cards, which tend to charge the most.
The most expensive retail credit cards may come with a 30.74% annual percentage rate, according to Ted Rossman, senior industry analyst at CreditCards.com, who calls the rate “crazy high.”
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Meanwhile, the average retail credit card charges 26.72%. Many other cards are charging 29.99%.
Credit card interest rates more broadly recently soared to 19.04%. That rate is the highest since Bankrate.com started tracking them in 1985, according to Rossman.
For retail credit cards, there has long been an unwritten rule among issuers that they will not go over the 30% annual percentage rate, likely for fear of scaring potential customers away, according to Matt Schulz, chief credit analyst at LendingTree.
“Given how quickly the Fed has raised rates and how often, we’re starting to finally see that ceiling crack a little bit,” Schulz said.
Consumers who are grappling with historic high inflation may also be tempted to open these lines of credit to give their holiday budgets some wiggle room. More than a third — 35% — of respondents to a LendingTree survey said they are at least somewhat likely to apply for a store credit card this holiday season, up from 29% a year ago.
But experts say you should carefully weigh the pros and cons before applying.
The value of an offer for 15% to 20% off your first purchase could be overshadowed by a higher annual percentage rate.
What’s more, if you can’t pay off the balance every month, you may be in for some expensive charges on your balance. Plus, there are other factors to weigh when determining whether the rewards will pay off.
1. Consider opportunity cost
When it comes to retail credit cards, there are generally two kinds: lines of credit that apply to a specific retailer, or other co-branded cards with credit card providers such as MasterCard or Visa that can be used more generally.
For a one-brand card to make sense, it should be a store you frequent often.
“You have to be a regular shopper to make this worth it,” Rossman said.
If you’re making a big purchase, such as buying several new appliances, the discount may be meaningful, so long as you are able to pay off the balance before accruing significant interest charges, Rossman said.
Still, you may want to weigh whether the rewards using a more general purpose card may be more generous or better match your spending style, he said.
2. ‘Understand what you’re getting into’
Opening a retail credit card can be a spur-of-the-moment decision when checking out at the store.
But before you accept the offer, you should do some due diligence, according to Schulz.
“It’s really important that you understand what you’re getting into before you apply,” Schulz said.
If the checkout offer sounds interesting, go home and research what it entails, particularly with regard to interest and fees. Then, if you still want it, you can still apply for it the next time you’re in the store.
That way, you’ll be making a more informed choice and be less likely to regret your decision, Schulz said.
3. Be wary of deferred interest
Some store credit cards offer what is called deferred interest, with a 0% introductory rate.
Notably, if that term expires and you have an unpaid balance, the credit card company can go back and charge you for all of the interest you would have accumulated, Rossman noted.
“Be especially wary if a store card is offering a deferred interest promotion,” Rossman said. “That retroactive interest can really hit you.”
4. Tackle unpaid debts
It’s not only new retail cards that are charging higher interest rates. Borrowers with existing retail credit cards may also see the rates they are charged go up soon, Schulz said.
As interest on unpaid debts also kicks up more generally, credit card holders would be wise to take a few steps to reduce their burdens.
First, strive to pay down as much of those balances as you can, according to Schulz.
Next, consider a 0% balance transfer card.
People don’t realize how good their chances are of getting their rate reduced.Matt Schulzchief credit analyst at LendingTree
“It may be the best tool that you would have in your tool belt for fighting credit card debt, because it can give you up to 21 months without accruing any interest,” Schulz said.
Those offers may not be as generous as the lending market tightens, which may include higher one-time balance transfer fees or shorter durations for the 0% rate, Schulz said.
Finally, try simply asking your current lender for a lower annual percentage rate.
A LendingTree survey from earlier this year found 70% of those who tried this were successful. But the key is you have to try, Schulz said.
“People don’t realize how good their chances are of getting their rate reduced if they just take the time to call,” Schulz said.