Beware store credit card offers as interest rates hit new highs

Retailers around the holidays double down on promoting store-branded credit cards, which often appear attractive to consumers, particularly when they offer immediate discounts.

The catch? Store credit cards now carry record-high interest rates, and can lead shoppers to rack up debt. The average annual percentage rate (APR) on retail store cards is now 26.72% — a record high and up from 24.35% last year, according to an analysis from CreditCards.com. The average APR on general-purpose credit cards is 22.66%.

Kroger, the nation's largest grocery chain, recently raised the APR on new offers for its credit card to a new high of up to 30.74%.

Thirty percent has long been viewed as an unofficial ceiling below which most card issuers kept their interest rates. 

Cards with interest rates higher than 30% were typically issued by smaller banks and geared toward customers with bad or no credit, according to Lending Tree. Cards issued by the major banks that dominate the credit card industry just didn't go there.

The Kroger Rewards World Elite Mastercard, issued by U.S. Bank, has shot past that threshold with an APR range of 17.74% to 30.74%. 

"The fact that the biggest grocery store in the nation was one of the first to do it matters. The fact that the card is issued by one of the 10 biggest card issuers in the nation matters, too," Lending Tree chief credit analyst Matt Schulz said in a statement to CBS MoneyWatch. "That means these rates are going mainstream, albeit slowly, and that doesn't bode well for consumers who are already struggling in the face of rampant inflation."

Wayfair and Speedway have also raised interest rates to up to 30.74% on store-branded credit cards, according to Lending Tree.

Personal finance experts caution against signing up for store cards, especially if you can't pay off the balance in full each month and face interest charges. If you carry a balance over to the next month, interest accrues and is tacked on to what you owe.

"If you are considering a store card, make sure you can always pay in full. If you pay in full, you're not charged this interest rate," said Ted Rossman, senior industry analyst at CreditCards.com. "If you carry a balance, you are charged interest every day, and that can be significant over weeks, months and years."

Beware of these offers

Some retailers offer products that promise not to charge customers interest on unpaid balances for 12 months, but once that period expires, retroactively apply a fixed APR. Those so-called deferred interest offers can sound appealing, but are often deceptive and come back to bite consumers down the road. 

• Federal Reserve lifts interest rates another 0.75 percentage point
• Americans are piling up credit card debt to cope with inflation

"Deferred interest is a nasty tactic that a lot of store cards use," Rossman said. "They may say no interest for 12 months, but if you fail to pay your balance in full [during that period] they go back and later charge you for all interest that would have accumulated." 

Do your homework

Rossman also advises against making a spur-of-the-moment decision to get a store card at the checkout counter, urging people to instead request a brochure and research the product. That's because a 15% discount at the point of purchase may come with strings attached. 

"You could think you're opting into a store loyalty program without realizing it's a credit product with an interest rate and debt and credit score considerations," he told CBS MoneyWatch.

It especially pays to be vigilant around the holidays, when retailers ramp up their marketing of branded cards 

Also research the rewards a store card offers and compare them to the perks you get from general use credit cards.

"There are opportunity costs even if you're not charged interest. It might not be a great card for you if you're not earning that many rewards," Rossman said.

If you spread your spending out across many different retailers, meanwhile, it probably doesn't make sense to sign up for a single store's card, particularly if it's only good at one brand of store. Some stores' cards are cobranded and can be used anywhere Visa or MasterCard are accepted, for example.

When a store card make sense

Applying for too many lines of credit can also ding your credit score, so choose carefully. 

"When building and accessing credit, you don't want to waste an application because you get dinged by credit bureaus if you apply for too much credit in a short period of time," Rossman said. 

Some store credit cards can make financial sense if you are able to pay off your balance in full each month and if they offer meaningful rewards at a retailer where you make a lot of purchases. 

For example, Amazon, BestBuy, Target, Walmart and Wayfair all offer credit cards that give customers 5% cash back on all purchases, Creditcards.com notes in its analysis.