Have you ever been tempted to sign up for a store credit card at your favorite retailer? The cashier may tell you that you can get instant credit approval and save big on your purchase, but money expert Clark Howard says you should think twice.
Store credit cards often offer a short-term benefit such as a term for 0% financing or cash back on purchases. But they also can be a long-term nuisance to your financial wellbeing because of potential pitfalls created by retroactive interest policies and exorbitantly high interest rates.
Clark wants you to stop and think ahead before succumbing to that temptation.
“At the register, they ask if I’d like to save a certain percentage on my purchase today or if I’d like their 0% offer. And I say ‘NO!’,” Clark said. “They look at you like ‘What is wrong with you?’, but it’s usually the right decision.”
I asked Clark’s advice about the different types of store credit card offers you may encounter. He gave his wisdom on the differences between in-house store credit cards and co-branded cards, as well as some of the potential pitfalls and advantages of store credit cards.
Why Clark Howard Doesn’t Like In-House Store Credit Cards
Clark is not against using a credit card to purchase items if you pay your bills in full each month or have a plan to quickly pay the balance off. But he is against putting yourself in a situation where you may owe large amounts of interest or fees on top of your purchase price.
Unfortunately, in-house store credit cards can often lead you down the latter path.
Here are a few reasons he would prefer that you stay away from the offers you receive in the marketplace:
1. The Interest Can Come Back to Haunt You
In-store cards often offer “same-as-cash” 0% financing for a set period, such as 6, 12 or 18 months. But there’s a catch.
Many of these cards can retroactively charge interest back to your purchase date if you fail to pay the balance in full by the end of the 0% period.
“With a lot of the store plans, the interest is retroactive to Day One if you haven’t zeroed your balance out by the end of the 0% period. Even if it doesn’t retroactively charge, what you pay moving forward with those is usually a very high boomerang charge,” Clark warns.
You can expect the non-promotional interest rate for an in-store card to hover above the national average APR, which was 16.01% at the time this article was written. For example, The Home Depot Consumer Credit Card advertised non-promotional interest rates in the 17.99% – 26.99% APR range in June 2020.
2. It Can Lead to Making a Purchase You Can’t Afford
The temptation to overspend is one of Clark’s biggest pet peeves with in-store credit cards. Easy access to store-specific credit may lead consumers to make purchases they otherwise would not have made if they had to hand over the cash at the point of sale.
“I hate for people to buy on 0% plans because what tends to happen is that people buy on those with money they don’t have. And they expect they’re going to have this interest holiday, but then the clock catches up on them and they can’t pay that off,” Clark says.
Clark says you should ask yourself this harsh-but-important question before making a major purchase on credit: “If you’re buying something you can’t afford that day, why is it that you think you’ll be able to afford it 12 or 18 months later?”
3. 0% Interest Isn’t All It Is Cracked Up to Be Right Now
Even if you’re a person who can afford to pay the balance in full and chooses store credit cards as a way to use someone else’s money in the meantime, Clark still cautions against these cards.
Theoretically, a 0% borrowing period could offer a chance to put the money you’d otherwise spend on the purchase back to work for you in the form of savings or short-term investment earnings.
“The value of 0% is very low right now, particularly given how little we can earn on our savings accounts. You’re not really getting any real benefit today from 0%, and you’re creating a burden that sneaks up on you later. That’s an unhealthy thing,” Clark says.
At the time this article was written, you were doing well to get a savings account interest rate north of 1% via an online bank.
4. They’re Useless for Purchases at Other Retailers
Most in-house store credit cards are merely lines of credit that are valid only within the shopping ecosystem from which you applied to get it.
For example, the Target RedCard is going to work for purchases at your local Target superstore or Target.com, but it won’t be a valid form of payment at the Walmart or McDonald’s down the street.
To enjoy store rewards and maintain spending power at other retailers, you may want to instead consider a co-branded store credit card that carries a Visa or Mastercard backing.
What You Need to Know About Store Credit Cards
If Clark’s advice hasn’t spooked you from considering a store credit card, there are some additional things you should know about them before you proceed.
1. The Difference Between Co-Branded and In-House Store Credit Cards
You can break down the store credit cards into two main categories: In-house store credit and co-branded credit cards.
In-house store credit cards are designed solely for purchases made at a specific retailer. If you apply for one of these, it will have no spending power beyond that particular store and its app or website. Clark’s advice above applies to this type of card.
Co-branded cards are credit cards that give discounts and benefits for a specific store but also can be used as a normal credit card at other retailers.
For example, Amazon has both a co-branded card and an in-house store card. The Amazon Prime Rewards Visa Signature Card is co-branded and the Amazon.com Store Card is an in-house charge card. You can see the differences in the spending capabilities and rewards here:
Clark is a fan of co-branded credit cards in the right situation. He carries four of them in his wallet to enhance the purchases he makes most often.
2. A Super Responsible Borrower COULD Reap the Rewards
Just because Clark strongly advises avoiding the headaches associated with in-house store credit cards, that doesn’t mean there can’t still be success stories. It requires discipline both in spending restraint and timely bill payment.
If you are the type of consumer who is carrying no debt and have the cash to pay for your store card purchase, it’s plausible that you could sign up for an in-store card to receive a large discount and then successfully eliminate the debt before any interest is due.
Before taking this risk, you need to do an honest assessment of your ability to repay the debt and whether or not the reward for which you’re applying is truly worth the risk.
3. Consistent 5% Cash Back Is Enough to Wade Into the Water
As much as Clark hates risking long-term debt issues with in-house store credit cards, he also recognizes a good deal when he sees it.
At that level of return, it even has Clark’s attention:
“5% is enough. What retailers did for so long was say ‘Would you like to save 15% on this purchase?’ and you get that 15% off one time. After that, there was no comparative advantage,” Clark says. “But when you look at Target with the 5% off every time, that’s substantial money. And you’re being subsidized by everyone else who shops there.”
Remember, you must spend within your means and pay your bill in full each month for that 5% cash back to be worth your trouble.
So, in summary, here are some things that Clark wants to you to remember when you’re faced with the store credit card pitch at the store:
- Retroactive interest could hurt you if you accept a 0% offer and don’t pay it in full on time.
- Store cards can tempt you to spend money you don’t have. Always ask yourself if the purchase is necessary and if you can pay it off quickly.
- Use 5% back on recurring purchases as the standard for an in-house store credit card. Anything less isn’t worth the trouble.
- Consider opting for a co-branded credit card instead. Clark says these are not “junk credit” and can be used to earn rewards at other retailers.
Bottom Line: If you’re going to add a store credit card to your life, you may want to consider going the co-branded route over the in-house option. These give you the perks you may seek from your favorite store without the limitations on spending at other retailers. If you do opt for an in-house store credit card, consider one that gives you a consistent reward like 5% off every purchase and always pay the balance in full.