Are Store Credit Cards Worth the Discount?

Many of us hit the stores pretty hard during the holiday season. And you might have noticed that whenever you got to the cash register, they asked you if you wanted to sign up for a store-branded credit card. Usually you can get some kind of discount if you do sign up, but is it worth it?

"GMA" financial contributor Mellody Hobson, the president of Ariel Investments, says no.

"I want to be absolutely clear," Hobson said. "I would not get one."

Store-branded cards are popular with stores because, like any other discount, they encourage people to buy things they usually would not buy.

VIDEO: Mellody Hobson explains the potential risks of store cards.
null

Hobson's advice is to avoid signing up for new credit cards, because the more cards you have, the more likely you are to spend money that you don't have. The average credit card debt per American household is above $8,300, according to creditcards.com.

"Why are [retailers] so anxious to sign us up for this?" Hobson asked. "We spend more money when we use a credit card."

'Enticing' Discounts With Store-Branded Cards

Most stores offer a discount off your purchase or a period of time with no interest if you get a store card, also known as private-label cards in the industry. Best Buy is offering no interest charges for 18 months on all purchases greater than $249 if you sign up for a card.

VIDEO: Mellody Hobson offers tax tips that can mean real savings.
null

The offers are "very enticing," Hobson said. "The idea is that you get these teasers. All of this sounds super until you actually do the math." If you aren't able to pay for the item in full and only make minimum payments, the interest charges will often wipe out any savings you got from opening the card in the first place.

Store cards don't have put you through same approval process as regular credit cards. Retailers do a quick check of your credit score, and you can be instantly approved to use the new card at the point of purchase.

Because of the limited verification, retailers can offer private label cards to consumers who are less likely to qualify for other types of credit and then charge them interest rates over 20 percent.

VIDEO: Credit Card Bill Advice
null

Because of the high interest rates on store cards, "they make a lot of money," Hobson said. "These cards are really profitable."

According to bankrate.com, the average variable interest rate for a regular credit card, or prime card, is around 12 percent.

Many of these cards also have an additional delinquency rate, Hobson warns, so if you miss a payment or two your rate can jump above 27 percent. Delinquencies for private label cards are usually 1-2 percent higher than prime cards.

Store Cards: Discounts vs. Dangers

This high delinquency rate is part of the motivation behind new restrictions proposed by the Federal Reserve that would make it more difficult for stores to approve credit instantly by requiring them to gather proof of income, The Wall Street Journal reported this month.

VIDEO: Best financial web sites
null

Impact on Your Credit Score and Credit History

In addition to the higher interest rates that these private label cards charge, Hobson says that just by opening up a new card you are lowering your credit rating.

"It absolutely lowers your credit score when you open up one of these new accounts," Hobson said. "That's just the way the math works for the credit rating agency."

A lower credit score can affect your ability to get a car loan, rent an apartment, or even get the job you want.

Page
  • 1
  • |
  • 2
Join the Discussion
blog comments powered by Disqus
 
You Might Also Like...