Are Store Credit Cards Bad?

Rising delinquencies suggest two reasons why you might want to stay away from an in-store credit card.

Are store credit cards bad? They can get you great deals, but high APR can be a problemThe debate has been going on since stores first started offering branded credit cards. Are store credit cards bad or can they be a good value? There are sound arguments on both sides, but a new report in USA today suggests that the naysayers may have a stronger case. As store-branded credit card delinquencies hit a 7-year high, experts say it reveals two big problems with in-store credit cards.

Nearly 5 in 100 in-store credit card users are behind

Equifax data shows that store credit delinquencies increased to 4.65%, up from 4.08% at the same time last year. That basically means that about five out of every one hundred store credit cardholders are more than 60 days late.

Seven years ago in 2011, Americans were recovering from the Great Recession. The economy today shows all signs of being stronger than ever. So why are store credit card delinquencies back at these levels? Credit experts have some ideas and they reveal two big problems with in-store credit cards.

Two reasons why in-store credit cards might be bad

Reason #1: APR is much higher on store-branded credit cards

The current average interest rate on store-branded credit cards is 25.5%. The rate on general-purpose credit cards is 16.73%. So, you’re paying nearly 10% more in interest charges when you use a store-branded credit card.

Unfortunately, credit card issuers may be targeting people who aren’t as well versed in managing debt at such a high rate. The senior analyst from CreditCards.com, Matt Schulz, says banks have started extending credit to more subprime borrowers as the economy continues to improve.

“Store credit cards are generally easier to get than your average credit card,” Schulz says. As a result, borrowers who are new to credit or rebuilding credit often turn to store credit because it’s more readily accessible.

“It’s a catch 22,” says Gary Herman, President of Consolidated Credit. “These cards are easier to get even with bad credit. But the higher interest rates mean the debt can be much more difficult to manage. Unless you’re versed in how to responsibly manage high interest rate debt, you can quickly run into trouble.”

Reason #2: Store closures don’t get cardholders off the hook

Equifax’s Chief Economist Amy Cutts also says that many store credit cardholders are also confused if they have a card for a store that closes. She believes many people make the mistake of thinking that going out of business means they don’t need to pay the bill.

“This is a huge mistake, as the lenders behind the private-label cards are still reporting to the credit bureaus,” Cutts says. “The decision not to pay on these cards in the hopes that the retailer will forget them will haunt these consumers for a while and will impact their ability to take out credit in the future.”

When it comes to store credit cards, there’s a difference between the lender and the retailer. The store named on your store credit cards is not the credit issuer. The issuer is the company you actually owe, and they expect to get paid even if the retailer goes out of business.

“If you don’t pay back a store credit card debt, even after business closure,” Herman explains, “the credit issuer will report the missed payments to the credit bureaus. This causes negative information on your credit report, and after about six months of nonpayment, they’ll send your account to collections.”

Think carefully before you get a store credit card!

“Store credit cards can come with some very attractive incentives,” Herman says, “and they often lure you in with big signup bonuses. But even more than with general-purpose cards, you must maintain careful control over store card credit card debt. You really want to avoid carrying a balance over month-to-month.”

Let’s say you charge up $1,000 on store-branded credit card. At 25.5% APR on a card with a $25 minimum payment requirement, most of the payment you make goes to interest charges. You pay $25 and $21.25 of that goes to cover accrued interest charges. That means only $3.75 of your payment goes to pay off the principal. So, you barely make a dent in the $1,000 debt. You only get down to $996.25.

“If you’ve run up balances on more than one store credit card, then you need to consider solutions for debt relief, like debt consolidation,” Herman continues. “Talk to a certified credit counselor to review your options so you can minimize interest charges and get out of debt.”

Press Inquiries

April Lewis-Parks
Director of Education and Public Relations

AParks@consolidatedcredit.org
1-800-728-3632 x 9344