Beware of store credit cards this holiday

Store credit cards can be used only at that store or retail chain and are usually offered at the register as you’re checking out. The cashier will usually tell you if you get a store credit card, you can get a discount on your entire purchase, earn rewards and possibly, get a “special financing” deal.

Sounds great, until you consider the interest rate you’ll be charged and how it will be charged if you don’t pay off the balance before the low interest or interest-free period ends.

It’s what industry experts call the “deferred interest” that can sink you. Fail to pay off your debt before the expiration and not only the sky-high interest rate but also the way it is retroactively applied has the potential to make holiday purchases up to 27.5 times more expensive than expected, according to WalletHub senior researcher Alina Comoreanu.

How does deferred interest work?

At the end of the promotional period, an extremely high interest rate usually kicks in. The average retail credit card annual percentage rate hit a record high of 26.72%, from 24.35% last year, according to an annual CreditCards.com study. By comparison, the average general-purpose credit card charged 22.66%.

But here’s the real danger: the rate will apply retroactively to your entire original purchase amount as if the low introductory rate never existed.

For example, you charge $2,000 and plan to pay it off before your promotion ends. Things come up, and you have a balance of $100 instead. The new rate will be charged on the full $2,000.

Are all retail credit cards bad?

No, but consumers should be careful and know what they’re getting into, said Ted Rossman, senior industry analyst at CreditCards.com.