Store-branded cards often try to dupe you. It’s the store’s card, so, clearly, it should get you the best in-house deals, right? Not always.
They often offer discounts, sometimes-great in-store rewards, and almost always no annual fee. At first glance, then, they’re a steal. And for some, it really is.
“If you have your financial ducks in a row, I have no problem with it,” said Karen Carlson, director of education and creative programs for InCharge Debt Solutions, a financial literacy nonprofit organization. “If you’re going to get a winter coat and you’ve got your finances in order, go for it,” she added; you can benefit from a great discount.
For the less financially fortunate, however, those benefits are simply store cards’ deceptive charm: these cards count on you falling for those concrete numbers—including the discount and the rewards—while hoping you’ll look past all those rates—like the APR. In other words, they expect that, when you’re at the counter, you won’t project your next few months of spending or debt.
Spending a greater percentage of your available credit hurts your ability to get good rates on loans, according to Todd Huettner, a real estate broker and president of Huettner Capital. The higher debt-to-credit-limit ratio you incur impacts your score, the chance you’ll get a good interest rate on a loan, or even whether you’ll qualify at all.
So, come prepared. The math is a chore, but it isn’t terribly hard. Let’s say you’re at the Gap this holiday season, and the cashier asks if you want 15% off, only by applying for their credit card. It sounds like a great discount, even if it’s a one-time deal, right?
Well, it depends. If you expect that you’ll owe Gap money for the months to come, as you recover from your holiday-shopping binge, then the answer is probably “no.” If you occasionally pay your bills late due to disorganization, then the interest payments likely aren’t worth the jump.
This is especially true if you have any big plans for your finances: “If you anticipate seeking credit–here’s a major downside—in the near future for a major purchase, if you’re buying a home soon or you’re gonna get a new car, too many recently open new credit lines will negatively affect your score,” Carlson said.
Case study: savings and discounts v. interest charges
Let’s say you buy $1,000 of jeans, tees, and button-downs in one fell swoop. And since you ordered all at once, every single item is eligible for your new Gap card’s 15% discount. This means that you save $150 bucks, and you’ll have $850 in debt. You might have trouble paying back that amount, especially during the holidays, when your spending is higher than usual.
Gap’s APR, the annual percentage they charge on interest, is exorbitant, at a flat rate of 23.99%. So, after a certain amount of time, that discount isn’t worth it.
If you pay down that $850 balance with $50 a month, it’ll take you one year and nine months – nearly till next Christmas – before you’re debt-free. In that time, you’ll have paid $174 in interest – more than your initial savings.
Don’t be taken in by store cards’ discounts. And if one does tempt, do your homework, and make sure the savings aren’t outweighed by interest payments.
Alternatives to store cards
General-purpose cards will serve you better than these store-branded cards, sometimes even those without rewards or discounts. If you still expect that you’ll need some time to pay off those blue jeans, take a look at no-interest cards like the Citi Simplicity. The Simplicity has no annual fee, and, best of all, it gives you 18 months of 0% purchase APR. That means you won’t accumulate interest on any item you buy for a good year and a half.
Even when the regular APR kicks in, it’s far better than Gap’s: it ranges from 12.99% to 21.99%, depending on your credit score. Even with the maximum APR, you’re better off—again, that’s after 18 months of debt relief, at 0%.
If you’re on the other end of the credit spectrum, and you’re looking for rewards, steer clear of most store cards, unless there’s a superb discount. Even with an annual fee, our favorite rewards cards often have a lot more to offer.