While shopping over the holidays, I was offered discounts at several retailers if I opened a store credit card. I declined the offers, but now I’m wondering: Are the savings worth the additional credit card? Elaine, Houston, TX

Store credit cards, also known as private label cards, have always been very popular with retailers. In fact, it seems like every time you get to the checkout counter to make a purchase, the store clerk is offering you some discount if you apply and are approved for a store credit card. For example, the popular retailer Macy’s is offering an additional 20 percent off all purchases made on the same day if you open a Macy’s credit card and charge the purchases to the card. And if that’s not enticing enough, store credit cardholders typically receive ongoing promotions or reward points by charging additional purchases to the credit card. While these deals may sound like an offer you can’t refuse, my word of advice is to avoid these types of cards. By doing so, you will save money and potentially points off your credit score.


How does not taking advantage of a discount save you money? 

The best way to address this question is by considering the math. Let’s say you open up the Macy’s card, buy a coat that costs $500 with the 20 percent discount, resulting in the coat costing $400. You cannot afford to pay the credit card bill in full when it arrives, however, you can pay just above the minimum payment of $15. Assuming the interest rate is around 24 percent, which is what the Macy’s credit card rate currently is, it will take you 39 months to pay off the $400, and you will pay more than $177 in interest, wiping out the savings you got from signing up for the card in the first place. So, just imagine how this could be detrimental to your financial health if you made even bigger purchases or continued to charge items to your card, even if you cannot afford it, in order to take advantage of store promotions.


If this is the case, why are they so popular?
 
The reason they are so popular is that, like with any other discount, consumers feel they are getting a great deal for their money. And the retailers love offering discounts with the store cards because they know this will entice people to spend more money than they originally planned or can afford. Furthermore, as retailers are not required to verify applicant information or perform other checks (they merely check the credit score of the applicant) that major credit cards such as VISA, MasterCard or American Express are required to do, they are able to provide instant approval, making it easy for the consumer to use the card instantly to make purchases. As a result of this lax approval process, retailers approve store credit cards to consumers who are less likely to qualify for major credit cards charging expensive interest rates over 20 percent than major credit cards whose interest rates are around 12 percent, according to www.bankrate.com. Furthermore, when comparing interest rates of store credit cards, some of the highest rates out there are Bloomingdales, Macy’s and Banana Republic store cards, which hover around 24 percent. And many of the store credit cards have expensive delinquency rates. That means if you miss a payment or are late on a payment, not only will this impact your credit score, you interest rate could potentially jump to as high as 27 percent. 

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