Lots of interest in this card, and that's not a good thing

It’s no secret that store-branded credit cards can carry some hefty interest rates. But Big Lots (BIG) is the worst offender among retailers in the category of those that charge rates akin to the penalty rates imposed on consumers with poor credit or behind in their payments.

Big Lots, a discount retailer with 1,445 stores in 47 states, tops the list with an annual percentage rate of 29.99 percent, according to a CreditCards.com report out Thursday.

“Essentially that’s what a lot of general-purpose cards will charge as a penalty rate for people who’ve been 60 days late or made mistakes,” said Matt Schulz, CreditCards.com’s senior industry analyst. “This should raise some eyebrows.”

The private-label credit card introduced in May includes an interest rate “consistent with the rate of other value oriented furniture store credit cards and Big Lots has the option of an introductory six or 12 month no interest deal that makes shopping even easier and allows our customers to take home their purchase that same day,” Big Lots emailed.

Not far behind is jeweler Zales (ZLC), at 29.24 percent, and office supplier Staples (SPLS), at 28.24 percent.

The annual percentage rate, or APR, assessed on retail cards has edged higher, reaching an average of 23.84 percent this year, up from 23.43 percent in 2015 and 23.23 percent the prior year. That’s a rise of a half-percentage point since 2014 and more than eight percentage points higher than the average rate of 15.22 percent on general-purpose credit cards.

“That’s significant, especially if you’re carrying a balance,” said Schultz, who noted that 42.1 percent of all card accounts carry a balance.

Retailers typically entice customers to sign up for their cards with incentives, but much of the time, they’re not that generous. For example, while half of the cards offered by the 100 largest U.S. retailers offer a sign-up bonus, just 13 exceed $25 for a $200 purchase, CreditCards.com found.

That said, 17 of the sign-up bonuses come as a percentage of the purchase, which could make sense for big-ticket items, the web site said.

For instance, Best Buy’s (BBY) 10 percent sign-up bonus would be worth $100 to someone purchasing a $1,000 TV, but only if the consumer pays the entire bill before interest starts accumulating. “There’s no point in saving 10 percent if you’re paying an interest rate of 25 percent,” said Schultz. “The key is to make sure you pay that balance off every month to make that high APR a moot point.”

Consumers should not allow themselves to be pressured into making an uninformed decision, advised Schultz. “We’ve all been offered discounts when we sign up for a card at the counter,” he said. Ask for a brochure, take it home and see if it still sounds good after you’ve done your homework, Shultz counsels. “Chances are, the perks will still be there.”

Retail cards are easier to get than the general-purpose credit cards, so banks issuing the retail cards “pick a single high interest rate to protect themselves from the risk associated with some of the folks that apply,” explained Shultz.

Consumers should also be wary of retailers advertising special financing of six months being the same as cash. “The caveat to that is that if you don’t pay balance in full within the intro period, you will have to pay interest on the full amount of the purchase rather than just paying interest on the remaining balance,” said Schultz.

That’s not say to store cards can’t be a good idea in certain cases. For example, Macy’s (M) and Nordstrom (JWN) offer discounts and rewards based on spending, which can be a good deal if you’re a regular customer, according to the analyst.

Target (TGT) is another case in point: Frequent shoppers at the discount retailer would benefit from the company’s 5 percent cash-back program, as the best general-purpose cash-back cards yield about 2 percent, CreditCard.com found.

That said, general-purpose credit cards typically offer better rewards than the average retail card, and heavy competition among card issuers makes it a good time to shop around, he added.

That’s especially because interest rates are likely to be headed only higher, given the Federal Reserve is expected to raise borrowing costs as soon as December, a process that follows an extended period of the Fed’s benchmark rate being at or near zero.

Over the past year, the central bank raised its benchmark rate by 0.25 percent, while the average store credit card interest rate rose 0.41 percent.

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