You've probably received the pitch at the checkout counter: "Would you like a 20 percent discount for opening a credit card with us?"
The offers can lead to savings for people who are store regulars and for consumers who diligently pay their balances off in full each month. But a survey by Creditcards.com of 61 major retail store credit cards found that stores are charging higher interest rates, making the offers less of a deal.
The study found that the average retail credit card charges an annual percentage rate of 23.23 percent, up more than 2 percentage points from 2010. Cards that can be used to make purchases at only one retailer had the highest rates, 24.48 percent, compared to 21.63 percent for store-branded cards that can be used at other merchants. Among the cards surveyed, Zales had the highest rate, with an APR up to 28.99 percent.
"If you pay your bill off in full every month, it can work for you," says Matt Schulz, a senior industry analyst for Creditcards.com. "But if you slip up, if you miss a payment, if you carry over a balance, the numbers can turn against you fairly quickly."
Here are some other things to consider if you're thinking about getting a retail credit card:
Interest charges can undo any discounts: Most of the retailers surveyed enticed consumers to sign up by offering a low introductory rate or giving them a discount of up to 20 percent on their first purchase. But those who don't pay off their card balances immediately could see those discounts completely erased by high interest charges. As Creditcards.com points out, someone who puts $1,000 on a retail credit card that charges the average interest rate of 23.23 percent would need 73 months to pay off the balance if they make only the minimum payment. They would also end up paying a whopping $840 in interest fees.
Rewards are getting more complicated: Retailers are rolling out more creative perks for card users, such as free tailoring services and VIP shopping events, Schulz says. But the best rewards go to the biggest spenders. Some retailers, such as Macy's and Nordstrom, use tiered loyalty programs that offer greater discounts and benefits to customers who graduate to "preferred" or "elite" status for spending more. But some consumers who don't study the rules may not take advantage of the rewards, he says.
Opening a new credit card can ding your credit score: A consumer's credit score drops by a few points whenever they open a new line of credit, says Greg McBride, chief financial analyst for Bankrate.com. This is a minor consequence when compared to the high interest rate charged on purchases. But people who are planning to apply for an auto loan or a mortgage soon should avoid applying for new credit, McBride said.
It's easy to max the cards out: Many of the credit cards issued by retail stores come with low balance limits of about $500 or $700. That makes it easy to max those credit cards out or creep near the spending limits. Credit card balances should be less than 30 percent of the spending limit in order to avoid damaging a consumer's credit score, McBride says. Balances need to be below 10 percent of the spending limit in order to help a person's credit score.
Bottom line: Retail credit cards can help people rack up savings, but the moment you decide to carry over a balance, those benefits can easily get wiped out.