Before you sign up for a store credit card, know what you’re getting into, experts warn as holiday shopping season approaches.

NEW YORK (AP) — As the holiday shopping season nears, financial experts are cautioning consumers about the potential pitfalls of store credit cards. Mykail James, a 19-year-old who worked a seasonal job at Victoria’s Secret, shared her experience of acquiring a store credit card with a $2,000 limit. After struggling to keep up with payments once her school break ended, she settled her balance but saw her credit score plummet. “I didn’t get an actual bank credit card until I turned 21, just because of that fear,” said James, now a financial specialist and founder of The Boujie Budgeter. “Because of how it impacted my credit and also made it harder for me to buy a car a couple of months later”.

Experts like Ted Rossman, a senior industry analyst at Bankrate, recommend exercising caution when offered store credit cards at checkout. “Most of the time it makes sense to say no,” he advised. Recent data from the Federal Reserve shows that total outstanding credit card debt reached $1.14 trillion in August 2024, raising concerns among consumers.

The average annual percentage rate (APR) for store-only credit cards is notably high at 30.45%, compared to the overall average APR of 20% for general credit cards. This APR indicates the interest charged if balances are not paid in full each month.

Expert Recommendations:

• Delay Your Decision: McClary from the National Foundation for Credit Counseling suggests not accepting store credit card offers immediately. “Request detailed information in writing that you can take home and review later,” he stated. This approach allows consumers to assess whether a store credit card is suitable for their financial situation.
• Best Practices for Using Store Credit Cards: If one decides to proceed with a store card, McClary emphasizes paying off the balance in full each month and limiting spending to what can be paid off within a single billing cycle. “You want to avoid falling into an unmanageable cycle of debt,” he cautioned.
• Using Store Credit Cards to Build Credit: While store credit cards can help establish credit history due to their lower eligibility requirements, McClary notes that other options like secured credit cards may also be beneficial for building credit without incurring high-interest rates.
• Store Credit Cards vs. Buy Now, Pay Later: With the rise of Buy Now, Pay Later (BNPL) services like Affirm and Klarna, Rossman highlighted that these options are gaining traction among consumers seeking alternatives to traditional store credit cards. “Companies like Affirm, Afterpay, and Klarna are gaining market share from store credit cards,” he explained.

As consumers prepare for holiday shopping, understanding the implications of signing up for store credit cards is crucial to maintaining financial wellness and avoiding potential debt traps.

Sources:
[1] https://apnews.com/article/store-credit-cards-financial-wellness-184d8e752bf2328ad7852092fb7415c6
[2] https://financialwellnesscenter.northwest.bank/money-management/spending/article/pros-and-cons-of-retail-credit
[3] https://www.investopedia.com/financial-edge/0511/store-credit-card-traps-to-avoid.aspx
[4] https://rcs.co.za/media/what-is-the-purpose-of-a-store-card/
[5] https://www.northwestern.edu/financial-wellness/money-101/credit-cards.html
[6] https://rcs.co.za/our-products/financial-wellness/
[7] https://finlit.yale.edu/planning/understanding-credit-cards
[8] https://www.washingtonpost.com/business/2024/09/23/store-credit-cards-financial-wellness/f2017e0e-79b5-11ef-980d-341a84fdff8f_story.html