With credit card interest rates averaging just over 15 percent, it’s not hard to understand why it’s a bad idea to carry a big revolving balance.
Running up bills that can’t be paid off each month is an especially bad move when it comes to store cards, which tend to charge much higher rates than general-purpose credit cards.
Interest rates on cards issued by America’s largest retailers are averaging 23.23 percent, according to a new survey by the credit card comparison site CreditCards.com, based in Austin, Texas. That’s 8 percentage points higher than the national average of 15.03 percent for all types of credit cards.
The survey included the 36 largest retailers in the U.S. that offer credit cards. Among the stores with the highest rates were Office Depot and Staples at 27.99 percent, and Zales, where rates ranged from 17 percent up to 28.99 percent.
A number of other stores were charging 26.99 percent, such as Dick’s Sporting Goods, JCPenney, TJ Maxx and Toys R Us.
Among the store-issued cards offering the lowest rates were Costco at 15.24 percent, Nordstrom, which ranged from 10.9 percent to 22.9 percent, and OfficeMax at 9.99 percent to 23.99 percent.
When a retailer has a range of rates, the offer is based on the applicant’s creditworthiness. Customers with the best credit scores — generally a FICO score of 750 and above — will qualify for the lowest rates, said Matt Schulz, senior industry analyst for Creditcards.com.
The chief reason that store cards tend to charge higher rates than general-purpose cards involves risk, he said.
“These are so-called instant approval cards where you know within a couple of minutes whether you [qualify],” Mr. Schulz said. “Those types of cards tend to be viewed as a little more risky. In order to hedge against the risk, they charge a higher interest rate.”
In a bid to attract cardholders, more retailers have begun offering co-branded cards aligned with the big credit card networks, the survey found. For example, OfficeMax has a Visa signature card good anywhere Visa is accepted.
Those types of cards generally charge slightly lower interest rates than regular private-label store cards, Mr. Schulz said.
The survey also identified a new trend among retailers of offering tiered rewards aimed at encouraging customers to use their cards. The more customers spend, the more benefits they earn — from early notices on major sales and invitations to VIP events to discounts on alterations.
Of course, the main lure among store cards is the promise of an instant 10 or 15 percent purchase discount for signing up at the register.
Consumers who carry a balance, even occasionally, should resist bonus offers, since higher interest rates will outweigh the benefits of the one-time discount, Mr. Schulz said. Instead, those customers should focus on finding low-rate cards, which currently are charging an average of 10.37 percent, Creditcards.com found.
The savings can be dramatic. Someone with a $1,000 balance on an average store card making minimum payments would spend just over six years and $840 in interest paying it off, Creditcards.com said.
By comparison, carrying the same balance on an average low-rate card would take a year and a half less to pay off and cut interest charges to $232.
With higher interest rates from the Federal Reserve looming for next year, now’s a good time for consumers with big card balances to start working hard to pay them off. The Fed appears poised to raise rates late in 2015, and possibly sooner if inflationary fears heat up or the labor market takes off.
Since most credit cards have variable rates tied to the prime rate, when the Fed moves, card rates should spike fairly quickly.
The bigger the balance, the bigger the hit.
For anyone needing another reason to get rid of credit card debt, a study this spring by Rutgers University indicated that their mental health may be at stake.
The study found that older adults (over age 51) with high levels of unsecured debt, such as card debt or medical bills, were more likely to show symptoms of depression. The higher the debt-to-income ratios were, the more likely these adults were to be depressed.
Patricia Sabatini: firstname.lastname@example.org or 412-263-3066.