Whether it’s a unique window display, big, red sale posters, online advertisement or simply their products, retail stores attract customers in a variety of ways. And to excite shoppers even more, many have store cards that unlock exclusive rewards or discounts.
Though appealing, these retail store cards can have an impact on consumers and their spending, both good and bad.
A 2019 study conducted by Credit Card Insider found that 40% of cardholders regretted signing up for a retail store card, which credit industry analyst Greg Mahnken said was quite shocking.
When trying to understand why this is the case, Mahnken found that one of the most common complaints was customer service.
“Depending on the card issuer, it may be hard to reach customer service and get the answers you need,” he said, adding that many retail stores don’t have the refinement when it comes to online bill pay, which can make a difference in making payments on time.
Retail cards also often have higher interest rates, and those types of charges can add up very quickly.
“It’s so easy to rip out your card and not realize how things add up,” said Patti Handy, senior mortgage advisor. “Then, they can’t pay in full and start to accumulate (charges), which is when it begins to snowball.”
These charges can quickly eat into and sometimes even negate any discounts you may have received.
Erick Arndt, a financial adviser at Virtue Wealth, agreed and said, “Some people tell me they pay them off every month, and I tell them, ‘You do now, but eventually, you won’t and then that’s when everything starts to fall apart.”
In fact, according to that same study, 50% said they paid interest charges on a credit card in 2018, and 20% said they still have leftover debt from last year’s holiday shopping.
Though many have high-interest rates, others will grant 0% interest for the first few months, which is called deferred interest.
“This is a way to utilize credit in your favor with ‘cheap money,’ but consumers need to be careful and not overextend themselves,” said Jerrod Ferguson, vice president at Vance Wealth.
Consumers need to be aware that with deferred interest, if any balance remains after that period ends, they will be charged interest on the original purchase amount. “Even if they only have $1 left,” Mahnken added.
Unless opening an account to make a major purchase, such as appliances or furniture, knowing you’re going to pay it off in full, Handy believes they aren’t a good idea.
“A lot of those purchases become emotionally driven and too easily accessible,” she said, adding that consumers then begin getting cards from all of their favorite stores. “They need to differentiate between want and need, or spending habits can start to ripple into everyday life.”
When motivated by rewards or discounts, it becomes more difficult not to spend more.
“It’s always recommended to only spend what you can afford to pay in full when the bill comes due,” Mahnken added. “Credit cards can be very rewarding if used responsibly, but they can also be a gateway to debt if used irresponsibly.”
Not only did 85% of cardholders sign up for a retail card in-store, but 73% did so to get a discount on their first purchase.
“The check-out lane of a store is not usually the best place to make credit or financial decisions,” Mahnken said. “You should do your due diligence to understand the terms, benefits and costs associated with any credit card before applying.”
For those who are looking to build up their credit, retail cards can be a great way to do so.
“My first credit card was a department store,” Ferguson said. “It allowed me to buy my items on a card and then immediately pay it off at the same register. Once I had this card for long enough and made a few on-time payments, I applied for a regular credit card and was approved.”
Handy agreed, adding that as long as you use and then immediately pay, never carrying a balance, this can be the easiest way to get credit and build a history before applying for a Visa or Mastercard.
Though there are benefits, both Arndt and Handy suggest keeping the number of cards to a minimum.
“When you have four and five cards, it’s too easy to get distracted and miss one,” Arndt added.
Handy also added that credit bureaus don’t like department stores, and instead like to see “good credit,” such as a car or school loan and mortgages.
“Ten percent of your credit score is the type of loan, and they like to see a healthy mix,” Handy added.
All agree that applying for, or closing, a card can also affect your credit score.
While applying for multiple cards can signal more risk to lenders, closing a card can not only hurt your utilization ratio, meaning you’re decreasing your available credit, but also your good payment history is lost when you close that card.