Woman using store credit card
Image source: Shutterstock

5 Ways Store Credit Cards Can Hurt You

Advertiser Disclosure This article/post contains references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services.
Last updated on July 7, 2022 Comments: 4

Have you ever signed up for a store credit card just to get a discount on a purchase or to get 0% financing for 12 months? We see it every day at stores like Best Buy, Home Depot, and The Brick. While store credit cards 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 retail credit card account. Customers are especially prone during the holiday months to sign up for a store card and special financing offers, in order to get discounts on all of the gifts they’re buying. But remember, the bank behind the store credit card 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.

5 Reasons to Be Wary of Store Credit Cards and Consumer Financing

1. High Interest Rates

Store credit cards typically charge a much higher interest rate than regular Mastercard, Visa, or American Express credit cards. For example, Flexiti, which offers a shopping credit card for use 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 Card charges an annual interest rate of 31.99% and the Home Depot® Consumer Credit Card 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 traditional credit card, which averages about 24.99% after two missed minimum payments.

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 Credit Cards

2. Membership and Admin Fees

It’s in the fine print, but some store credit cards charge a membership or administrative annual fee. Take The Brick’s FlexitiCard, for example, which charges an admin fee of up to $199.95 depending on the purchase amount and terms of the promotion. A financing credit card with Best Buy 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.

Of course, annual fees aren’t anything new. Many traditional credit cards come with fees, but they also offer increased perks along with those fees, such as travel insurance, cash back, discounts on car rentals, loyalty rewards points, and more. Wherease store consumer cards that aren’t Visa, Mastercard, or Amex don’t typically offer such bonuses, but might still come with annual fees.

Related: Best No Annual Fee Credit Cards in Canada

3. Payment Protection Insurance

Do your math on payment protection insurance. Depending on your purchase (and how quickly you pay it off), you could end up unnecessarily forking over a lot of extra cash.

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 credit cards 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 traditional credit card, 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.

Related: Avoid Credit Card Balance Insurance Like the Plague

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 deferred interest 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.

5. Credit Checks

Applying for multiple store cards during a short time period (like the holidays) to get store discounts can damage your credit score. According to Equifax, one of the factors that is used to calculate your credit score is how often you seek credit. Each and every time you apply for a new card, the bank will pull a credit check from the credit bureau, feeding into your credit history. The more you seek credit, the higher the risk you appear to banks. And as a result, your credit score 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 credit score deteriorates, and their perceived risk increases. Signing up for a store credit card just to buy a new stereo might not be worth it if you end up with a tick against you on your credit report.

Related: 6 Reasons Why Your Credit Score Might Have Dropped

What About Mastercard, Visa, and Amex Store Credit Cards?

Instead of a closed-loop consumer credit card that is exclusively for use at their store (or family of stores), some retail businesses offer a traditional credit card (Mastercard, Visa, American Express) that can be used anywhere, but that enables you to earn special rewards or cash back rates for their store network. Some retailers also offer both versions, but this is far more common in the United States than in Canada.

For example, the Amazon.ca Rewards Mastercard earns you points that can be redeemed for an Amazon.ca gift card, and the Walmart Rewards™ Mastercard® scores you Walmart Reward Dollars for use both in store and online.

You’re almost always better off getting a more traditional, co-branded store card rather than a closed-loop store card, if nothing else than for the sheer flexibility of being able to use the traditional credit card elsewhere. And if your store of choice doesn’t offer a regular credit card, then a cash back credit card is a good alternative, allowing you to earn statement credit rather than store credit.

There are several cash back cards that have no annual fee 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 Best Cash Back Cards in Canada to find one that suits your spending habbits.

Final Word

The best credit card is one that enables you to shop with benefits like cash back, low fees, or rewards 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 store card and you’re carrying a balance you can’t pay off right away, we definitely recommend you transfer your balance to a low-interest balance transfer card. Some balance transfer cards will allow you to go from paying 31.99% interest (or whatever your store card is charging you) to 0% for 12 months.

Related Articles:

Author Bio

GreedyRates is Canada’s go-to resource for all things personal finance. Our expert articles and videos cover every topic under the financial sun, including credit cards, credit scores, loans, bank accounts, budgeting, investing, RSPs, TFSAs, GICs, taxes, and more. Want our advice on a personal finance issue? Send us an email at [email protected] and we’ll gladly give you some free tips.

Article comments

annab says:

Cancelling your first card meaning your “oldest” card will, most definitely HURT your credit score. Average credit age does play a factor in your score. Having an inactive card won’t hurt you, but closing it would.

Emily says:

Oh, get rid of the Sears card but watch out because they’ll tell you if you paid off your statement, it’s not your “Main Statement” and still owe them money. F-ing shameful and greedy that they have to squeeze a few more dollars out of people. Worst card company paired up with an even worst retailer. Cut your losses, because that store is going to be nothing but a bad memory soon enough.

Joe says:

My first Credit Card is Sear card and I read in some article that we should not cancel the first card as that will effect my credit rating if I cancel. I’m not using this card and I don’t know what to do. Pls suggest

GreedyRates says:

Hi Joe, cancelling your “first” credit card per se, will absoultely not affect your credit rating. If you’re no longer using it, and feel more comfortable cancelling it, go ahead and do so. We would just recommend the following: make sure you have at least 2 credit cards in your wallet from different banks, and make sure your total credit card loans outstanding do not exceed 30% of your credit line. Hope that helps.

Greedy Staff