5 Ways Store Credit Cards Can Hurt You
Have you ever signed up for a just to get a discount on a or to get 0% financing for 12 months? We see it every day at stores like , Home Depot, and The Brick. While and consumer financing aren’t as ubiquitous in Canada as they are for our neighbours to the south, they are still common enough, especially when you’re making large purchases such as furniture and electronics.
On any given day, a sales associate could ask you if you want to save an additional 10% by opening a account. Customers are especially prone during the holiday months to sign up for a and offers, in order to get discounts on all of the gifts they’re buying. But remember, the bank behind the is in it to make a profit, and there are real risks to using these cards.
Keep in mind that the cards we’re referring to here are ‘closed-loop’ store cards, meaning they can only make purchases from the specific retailers that issue them. These are different than co-branded store credit cards issued by mainstream financial institutions, which may have special retailer partnerships but can nonetheless be used at any store that accepts the card’s network (Mastercard, Visa, or American Express). Unlike closed-loop store cards, co-branded store cards typically have consistent interest rates in line with regular credit cards (around 20%), and some have really lucrative rewards and cash back features.
In This Article:
5 Reasons to Be Wary of and Consumer Financing
1. High Interest Rates
typically charge a much higher than regular Mastercard, Visa, or at over 7,000 retailers across Canada including Peoples, SleepCountry, and Wayfair, has an annual interest rate of 31.99% on regular credit purchases (i.e., those not made under a specific store’s promotional offer).
And that interest rate jumps even higher if you miss a payment or fail to pay the balance in full by the end of the promotional period. Flexiti’s annual interest rate could jump as high as 37.99% if you miss your minimum payment twice in a 12-month period.
Even store cards that offer 0% interest can spike well beyond the rates of traditional cards should you miss a payment. The Staples annual of 31.99% and the Home Depot® Consumer charges 28.8% if you miss a payment or fail to pay off the balance in full by the end of the promo period. Compare that to a , which averages about 24.99% after two missed minimum payments. charges an
Obviously, if you pay off your balance according to the card’s terms, interest shouldn’t be an issue. But as we know—and the banks count on—many cardholders don’t pay off their balances in time.
Related: Best Low-Interest
2. Membership and Admin Fees
It’s in the fine print, but some charge a membership or administrative . Take The Brick’s FlexitiCard, for example, which charges an admin fee of up to $199.95 depending on the with comes with a $35 annual membership fee for Quebec residents. Even if you pay off your balance before the promotion period is up, you’ll still be charged the fee. amount and terms of the promotion. A financing
Of course, annual fees aren’t anything new. Many traditional come with fees, but they also offer increased perks along with those fees, such as travel insurance, back, discounts on car rentals, loyalty points, and more. Wherease consumer cards that aren’t Visa, Mastercard, or Amex don’t typically offer such bonuses, but might still come with annual fees.
3. Payment Protection Insurance
Do your math on payment protection insurance. Depending on your (and how quickly you pay it off), you could end up unnecessarily forking over a lot of extra .
For example, if you opt into The Brick’s payment protection plan, you’ll be charged $1.39 monthly per $100 of your outstanding balance. For easy math, let’s say you bought a $2,000 washer/dryer combo with a plan to pay it off in equal monthly payments for 20 months, so $100 per month. By the end of those 20 months, you’ll have paid $292 in payment protection. (Assuming you have a 0% interest agreement, otherwise it could be more).
If you’re really worried you won’t be able to pay off that $2,000 washer/dryer set, then maybe that extra $296 will offer you peace of mind. If that’s the case, by all means, go ahead. The point is, do the math before jumping on top of a payment protection plan you don’t really need.
As a general rule of thumb, balance insurance on even regular , balance insurance or payment protection usually costs about $0.99 per $100 of your average daily balance, which doesn’t sound like much but can add up quickly. tends to be useless for most people. It costs a fortune and very few people ever end up using it—that’s why it’s so profitable for the banks. On a
4. Offers of 0% Down
Keep in mind that 0% for 12 months isn’t always 0% for 12 months. Very few offers are more tantalizing than a offer of 0%. But remember, many banks require that you still make the interest-free monthly payment each month during the 12-month promotional period.
Guess what happens if you’re late on one payment in month 11? Bye-bye promotional rate.
Applying for multiple during a short time period (like the holidays) to get discounts can damage your . According to Equifax, one of the factors that is used to calculate your is how often you seek the , feeding into your . The more you seek , the higher the risk you appear to banks. And as a result, your ach and every time you apply for a new , the bank will pull a check from may drop.
If your score does drop, you could also see the interest rates of some of your other loans rise, as some lenders reserve the right to adjust interest rates if your deteriorates, and their perceived risk increases. Signing up for a just to buy a new stereo might not be worth it if you end up with a tick against you on your .
Related: 6 Reasons Why Your Might Have Dropped
What About Mastercard, Visa, and Amex ?
Instead of a closed-loop consumer that is exclusively for use at their (or family of stores), some retail businesses offer a (Mastercard, Visa, ) that can be used anywhere, but that enables you to earn special or back rates for their . Some retailers also offer both versions, but this is far more common in the United States than in Canada.
For example, Canadian Tire’s Triangle™ Mastercard® offers back in the form of ®†, the Amazon.ca Mastercard earns you points that can be redeemed for an Amazon.ca , and the Walmart Rewards™ Mastercard® scores you for use both in and online.
You’re almost always better off getting a more traditional, co-branded closed-loop store , if nothing else than for the sheer flexibility of being able to use the traditional credit card elsewhere. And if your of choice doesn’t offer a , then a back is a good alternative, allowing you to earn statement rather than .
There are several no or waive the fee for the first year as part of their welcome bonus; that alone makes them more advantageous than many financing cards. See our picks for the back cards that have Best Back Cards in Canada to find one that suits your spending habbits.
The is one that enables you to shop with benefits like back, low fees, or points for your favourite retailers. Do your research before signing up for any credit card, but especially for a store card. You want something that’s going to pay you back, not just supply a quick fix when it’s holiday season or when you’re eyeing a living room set that’s beyond your budget.
If you already have a and you’re carrying a balance you can’t pay off right away, we definitely recommend you transfer your balance to a low-interest . Some balance transfer cards will allow you to go from paying 31.99% interest (or whatever your is charging you) to 0% for 12 months.