Retail or department store credit cards are promoted as being convenient and a “must have” for shoppers at their favorite stores. The cards can earn consumers extra discounts on their items at sign up and during special sales, and some stores even offer rewards programs for frequent card users. Unfortunately, the interest rates on these cards are notoriously high, and a recent survey from creditcards.com shows that they continue to grow. One of our own counselors provided insight for the creditcards.com story, but we wanted to take the opportunity to provide some additional information. While it’s nice to know the average rates and which cards have the highest rates, it’s more important to know how to pay these off in a responsible way. And in this case, that means paying them as quickly as possible. That angle isn’t getting as much press, but it’s important for you to know.
A Little Background
We still need to cover a bit more background about these cards and how dangerous they can be. Here are some key facts that will be important to keep in mind when thinking about repayment:
- The cards have an average APR of 23.23 percent, which is about 8 percent higher than a general credit card
- The cards have low limits
- Low limits and other factors on these cards can ding your credit score significantly
Paying off Retail Cards
We will spare the generic advice here, but definitely be sure to use all the common sense repayment strategies with these. That means, most importantly, paying on time each month. Once that’s established, use these tips to optimize your repayment:
Prioritize the higher interest rates.
This is not the time for the snowball method. We know how psychologically uplifting the debt snowball can be, and we recommend it for the right person and situation. However, this isn’t one of those situations.
Think about it: a store card rate is so high that it just doesn’t make sense to put off the payment. When you combine this with a low credit limit, you are really asking for trouble. Why? Because the low limit means you will have a higher credit utilization ratio. That spells bad news for your credit score.
So, if at all possible, optimize your repayment with the ladder method. This just means putting all of your extra funds each month to the the account with the highest interest rate. Knowing just how dangerous the store card can be, and how much it can be holding back your credit worthiness, should be enough of a tangible reality to provide all the psychological boost you’ll need.
To put it in perspective, here’s a good summary from a recent TIME article about what happens if you just pay the minimum:
“CreditCards.com ran the math, and someone who charges a $1,000 TV and pays only the minimum would need 73 months to pay off the debt and incur $840 in interest charges over that time. With the average card, it’s 56 months and $396.”
So be sure to prioritize these above lower-rate, traditional credit cards. Another piece of good news here is that the low limits, while bad for your credit, might be a good thing for your ability to repay. You won’t have to worry about major balances that will be as intimidating. Instead, you’re typically dealing with much more manageable amounts.
Try a Balance Transfer
For consumers with good credit, this might be a reasonable option. If you’ve got a balance on a high interest store card, check with credit card companies to see if they will allow you to transfer the balance to a new account with them. Ideally, the new card will have low interest or a zero percent introductory rate. You’ll have to pay fees and will be up against another ding to your credit by opening a new account, but the potential interest savings could be worth it.
However, this might be a little trickier with store cards than traditional cards. And, again, because of the low limits, and relatively low balances, the savings may not be significant enough to warrant the transfer.
Seek Outside Help
We hope you don’t find yourself in this position, but many consumers have retail cards that are just part of their overall financial crisis. If they have multiple creditors and are falling behind, it’s easy to feel overwhelmed. In those situations, after other options have been exhausted, it’s probably best to seek some outside help.
Nonprofit credit counseling can be a great solution. The initial budget and credit counseling session will allow the consumer to review their budget thoroughly with a counselor and create an action plan to move forward. A debt management program can also be a good fit, as it may help the consumer secure lower interest rates and other favorable repayment terms.
At the end of the day, you will want to avoid store credit cards whenever possible. But if you do have some, make it your goal to pay off the balances as quickly as possible. Have any other advice, tips, or stories about store cards? Let us know in the comments below.