Why retail credit cards have hit record-high interest rates

Average interest rates on retail credit cards hit a record high of 30.45%, according to new Bankrate study. Bankrate senior industry analyst Ted Rossman joins Wealth! to discuss why store credit cards have such high rates and how consumers can navigate paying these down.

Rossman notes that the Federal Reserve's interest rate hikes over the last few years have played a role in the high rates on store credit cards. However, he explains that retail credit cards are less selective on credit quality, leading to a bump up in their rates. In addition, he explains many retailers rely on late fee revenue, and with the Consumer Financial Protection Bureau looking to cap late fees, some retailers are raising rates to compensate for lost revenue.

The cards with some of the highest rates come from retailers like Petco (WOOF), Michaels, and Big Lots (BIG). Meanwhile, the card with the lowest rate comes from Amazon's (AMZN) secured credit card, which has a 10% APR (annual percentage rate) and a low credit line.

Rossman encourages shoppers to pay their credit cards in full when they can, and moving existing debt to a 0% balance transfer card. These cards allow people to pay off debt with 0% interest for a fixed period of time — usually a year — allowing them to make significant progress on their debt. He also stresses the importance of reading the fine print before signing up for any loyalty programs or rewards cards to ensure you're not signing up for any credit cards you don't want.

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

This post was written by Melanie Riehl

Transcripción del vídeo

Well, with major holidays coming up, retailers are eager to push out promotions including offers for their credit cards.

Now, these cards help retailers build brand loyalty with shoppers by offering perks like rewards and discounts, but they can come at a steep price.

A new bank rate study shows that average interest rates on a store card hit a record high of 30.45% this year.

I'm here to explain why these rates are high and what it means for card users.

It's Ted Rossman, senior industry analyst at Bankrate.

Good to see you, Ted.

So first of all, how did we get to the point where we're now looking at interest rates, retail credit card interest rates of over 30%?

It is pretty shocking, isn't it?

30% used to be this kind of unofficial ceiling that few dared cross on a lot of credit cards.

The penalty apr is 29.99% if you're very late and you get put in the penalty box or for others.

If you have a really low credit score, maybe your rate is north of 30.

But yeah, it's common on store cards.

The fed rate hikes the last few years are part of it, but they're not the only story, retail credit cards are easier to get.

So because they're less selective on credit quality, they bump up the rates.

One other thing that's been going on is a lot of store cards rely on late fee revenue and the Consumer Financial Protection Bureau is trying to bring that average late fee down from $32 to a cap of just eight.

It's been put on hold by a federal judge, but some store card issuers have already started raising rates and other fees to compensate for what could be lost revenue on late fees.

Now, it's interesting looking at the, the data in terms of the spread between some of these retailers that offer cars with the highest and lowest APR S. Which ones did you see as the highest and the lowest 35.99% is the highest.

So we're talking about cards from Petco Michael's piercing pagoda.

Big lots good Sam, a few others, the lowest come with an asterisk.

There's an Amazon secured card that has a 10% APR but a secured card of course means you're putting down a deposit.

It's a low credit line, not that we want you to carry debt on any credit card, but especially a secured card.

It's not really something that you should be carrying debt on.

Um, but again, you don't want to carry debt on those 30 plus percent ones either.

Um, there's a military star card that can be used at military bases and commissaries.

That one has an APR around 15.

Both of those are very special cases.

Everything else we surveyed and we looked at all the cards from the 100 largest retailers.

Everything else was over 20%.

On average.

Many were above 30.

So then how can shoppers try and avoid some of these high interest fees with retail card?

The best advice is to pay in full if you can.

And I realize that may be easier said than done, but maybe you're better off without one of these credit cards.

You know, if you have existing debt, move it to a 0% balance transfer card, knock it out that way.

But sometimes people fall into these cards by accident.

You know, you get that pitch at the sales counter about 10% off 20% off today's purchase.

Maybe you don't even realize you're signing up for a credit card.

Maybe you think it's a store loyalty program and you don't realize there's a credit check and a high interest rate you want to go in with eyes wide open.

It's fine to say no or not right now.

Be wary of deferred interest promotions too.

That's common on store cards where they say no interest for 12 months.

But when it's framed as deferred interest, if you don't pay the full amount by the time the clock runs out, then they go back and they charge you retroactively for all of the interest that would have accumulated store cards.

Really only work if you're very confident you can pay in full.

And if you're loyal, you know, if you shop at Target a lot or Best Buy or Amazon and you use their card and you get 5% back every time you buy something from them with their card.

That works, but it starts with paying in full to avoid interest.

Indeed, you raised a good point.

No point getting that 20% discount owed to be paying, you know, 30% interest rates.

Appreciate you laying all that out for us, Ted Rossman.

Always good to see you senior industry analyst at Bankrate.

Thanks for having me.