Understanding Store Credit Cards: The Hidden Costs

By Chris Taylor
NEW YORK (Reuters) – As you gear up for last-minute holiday shopping at any big box retailer, there is a good chance you will be offered a store credit card with a nice discount on today’s purchase and even a 0% interest rate for an introductory period.

What’s not to like, right?

Alas, some store credit offers are tripwired with something called 'deferred interest,' which can be a nasty little debt bomb.

How Does Deferred Interest Work?

“If you don’t pay off the balance in full by the end of the promotional period, you’ll owe interest on the entire purchase amount from the original date,” explains Melissa Caro, a New York City financial planner and founder of the platform My Retirement Network.

That means you could end up paying 27.5 times more compared to general-purpose credit cards, which do not use deferred interest, according to a new study by financial information site WalletHub.

The site reviewed store cards offering 0% introductory rates and found 85% of them are using deferred interest.

“Deferred interest is the most misleading thing that currently exists in the credit-card market,” says Odysseas Papadimitriou, WalletHub’s founder and CEO.

Of course, consumers rarely read the fine print of those credit-card agreements, and the person at the checkout counter likely is not going to know about financing details, either.

In fact, 61% of people do not even know how deferred interest works, according to the WalletHub survey.

The High Cost of Store Cards

The other problem here: Interest rates on store cards are typically extremely high. The current average is over 33%.

How to Protect Yourself from High-Interest Surprises

Here are five factors to consider when choosing a store credit card:

1. Not All Store Cards Are Alike

Some store cards will not hit you with deferred interest. According to the WalletHub survey, examples include The Gap, Williams Sonoma, Neiman Marcus, Nordstrom, Costco, Target, and Pottery Barn.

However, others may not currently have deferred interest but reserve the right to do so in the future. Always ask before signing.

2. Opt for Non-Store Credit Cards

If the 0% introductory offer appeals to you, consider getting it from your bank instead of a retailer.

“The simplest advice we have is, give preference to a regular general-purpose credit card with a 0% offer on it,” advises Papadimitriou. This will likely come with lower eventual interest rates too.

3. Be Realistic About What You Can Afford

As of November, nearly half of Americans were still paying off holiday debt from last year, according to WalletHub. If you cannot realistically pay off a purchase within the promotional period, reconsider the purchase.

4. Use Store Cards for Rewards, Not Financing

Store cards may be useful for building credit or earning rewards. However, try to pay off balances quickly, as “store cards are great credit-building tools and rewards tools, but horrible financing tools,” says Papadimitriou.

5. Automate Your Payments

Leaving credit card payments to chance can lead to trouble, especially with deferred-interest cards. “Divide the expense by 12, and schedule automatic monthly payments from your bank account to credit card,” suggests Erika Safran, founder of Safran Wealth Advisors in New York City. “You now have a zero-interest 12-month loan.”