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0% APR for Retail Cards? Be Careful

by . (Posted in: Credit Cards / Personal Finance News)


Detroit Lions Extra Points Credit Card

Intro APR: See Terms*
APR: 14.99%, 19.99% or 24.99%*
Annual Fee: 0*
Detroit Lions Extra Points Credit Card

Detroit Lions Extra Points Credit Card

Retail cards are far different than the traditional credit cards you’re now carrying in your wallet. Deferred interest rates are often misunderstood.

For years, consumers have faced the same question as they’re checking out of their favorite retail store: “Would you like to open an account with ABC and save 10 percent today?” There’s a reason we’re hit with that question at that particular moment. While we’re processing what’s just been asked, the clerk is already telling us that we can be approved in just a few seconds. We’re standing there, knowing there are people behind us, and suddenly, it’s like a spotlight hits us and we become very much aware that nothing else is going to happen until we answer that question. And that’s what retailers are hoping for.

There’s a new incentive: retail cards often come with the promise of 0 percent APR for six (or longer) months. This means we can run back to the shoe department and pick up those boots we were eyeing. We might have wanted to get them, but opted not to when we began doing the math in our minds. Now suddenly, we learn we can get them today, keep our cash and then repay the loan with no interest. It’s a win-win, right? Eh…maybe.

Maybe it’s more of a big ticket item, say, a new washer and dryer? You might be offered the opportunity to open an account and avoid paying interest for two or three years – and all the while, building or further cementing your credit scores. Either way, retail cards aren’t all they’re cracked up to be and making an “on the spot” decision is rarely a smart game plan.

The fact is, these zero percent retail cards are not like traditional bank and credit card offers. Your Capital One credit card’s promise of zero percent APR is exactly what it says: no interest. On the other hand, there are a ton of differences between those and the retailer’s offers.

Zero Percent Deferred Interest

Here’s the kicker that makes the difference: If you have any balance at all left on your card after the end of the promotional period, not only does a high APR kick in, but it’s also retro. That means if you opened the account and put a washer and dryer on it to the tune of $2,000, and then two years later, you still owe, say, $100, the APR kicks in and it’s calculated on the initial $2,000, not the remaining balance of $100. Wondering if it’s legal? It is if it’s spelled out in the terms and conditions, it is – and it is always spelled out, in case you’re wondering.

And there’s one more very distinctive difference: the APR on these cards hovers around 25 percent. That’s 10 percent higher than the average rate of 15 percent for traditional credit cards.

The “deferred interest” clause is what throws consumers. Many have no idea it’s different than a general credit card. And again, this is exactly what retail card networks are hoping for.

Basically, you’re offered a spur of the moment opportunity to take out a new credit card (which can also impact your credit score in the short term), but in that moment, you’re not only feeling the pressure of others behind you so you don’t ask questions, but you may not even get the terms and conditions until after you’ve been approved and charging those purchases. Even if you did ask a sales clerk, there’s a good chance that he wouldn’t understand the terms and conditions either, including what the deferred interest clause means.

Provided you do understand the meaning of deferred interest and if there is a considerable 0 percent interest window, these offers could be good for some consumers. If you do take this route, your primary goal should be to pay the balance off as soon as possible, even if there’s still time under the no interest clause. You don’t know what the future brings and the sooner that monkey’s off your back, the better.

Consider a Traditional Credit Card

A traditional credit card is preferred for a number of reasons. First, you’re already know what you’re up against, regardless of any promo promising no interest. A major credit card offers a number of protections, including fraud and protections from damaged or defective goods. Of course, retailers usually have liberal return policies, but every layer of protection counts. At a minimum, if you do opt for the retail card, and if something happens that will prevent you from paying the balance in full within the window of time, you should consider paying it off with your Visa or MasterCard. That’s not the ideal solution, but when you consider the alternative (a retro interest rate), it becomes much more attractive.

Better Offers

There’s an even better reason to forego the retail cards in lieu of your major card: the incentives are on the rise. Many credit card offers are including extended 0% timeframes. No transfer fees and higher cash back rewards are two of those incentives that are once again falling into favor with banks. Remember, for quite some time, banks had reined in those perks in order to offset their lost profits following the new financial laws that put strict guidelines in place.

You could see credit card offers with 18 month intro rates for both balance transfers and purchases or you might enjoy double rewards points or cash back opportunities.

Unfortunately, many subprime consumers who are unable to garner an approval for the traditional bank cards will find an approval waiting for them with the retail charge cards. Misunderstanding the terms and conditions can further complicate efforts of rebuilding credit. It’s a huge gamble, to say the least.

At a minimum, consumers are encouraged to resist the quick credit report and approval process at the checkout counter and instead, research the offer on the retailer’s website. If it’s still a good fit, you can use it in the future. The trick is understanding, in full, the terms and conditions. Further, it’s important to check your monthly statements so that you always know what your outstanding balance is. Odds are, out of the crosshairs, you may realize that it wouldn’t have been a smart move after all.

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