While the Federal Reserve Keeps Interest Rates Near Zero, Retail Store Credit Cards Charge High Rates

Despite historically low interest rates from the Federal Reserve, many retail store credit cards still charge inordinately high annual percentage rates, or APRs.

While the Fed’s benchmark fed funds rate has remained near zero all year, as of September 2020, the average annual interest charged by retail credit cards now amounts to 24.43% -- down from 26.01% last year, according to CreditCards.com.

The average rate on store-only credit cards fell from 27.52% to 25.9%, and the average rate on co-branded cards (which can be used in more than one retailer) dropped to 22% from 23.39%.

Meanwhile, the national average rate for all non-retail cards fell from 21.1% last year to 19.69%.

Out of 84 retail credit cards surveyed by CreditCards.com, 67 have lower APRs than last year, 15 have the same rates and two actually increased their rates.

A number of store-only cards’ interest rates are as high as 29.99% -- including those issued by Big Lots; Discount Tire; Jared, The Galleria of Jewelry; Kay Jewelers; Piercing Pagoda; Sterling Family of Jewelers; and Zales.

A survey by CreditCards.com also revealed that some 62% of U.S. adults have applied for retail credit cards at some point in their lives. Typically, retail credit cards often provide large discounts to customers on their first purchases – helping to reel them in as borrowers.

Howard Dvorkin, chairman of the website Debt.com, explained that high APRs are designed for high-risk borrowers – which also means that qualifying for and receiving a retail credit card is easier than obtaining a “regular” general purpose credit card.

Another problem with high-APR retail credit cards has to do with deferred interest – that is, when interest payments on a loan are deferred for a specific period of time.

“Even if a single dollar is left unpaid after the deferred interest period is up, you’ll pay interest accrued from the moment you made your purchase – and this can add up, especially if you use 12 months of deferred interest or longer,” said Adem Selita, CEO and co-founder of The Debt Relief Company.

Selita also noted that customers often open up retail credit cards during the Christmas holiday season – attracted to the prospect of getting a big discount on big-ticket items. But they will be slapped with exorbitant APRs later on.

“This really defeats the purpose, and if you do the math you will see that the items you bought are actually costing you much more than the retail price you paid – due to compounding daily interest,” Selita said.

Kasey Ring, president of the financial coaching firm Upward Personal Finance, said the only reason to consider getting a retail store credit card would be to begin building credit history.

“I would advise [people] to put a very small amount on this card and pay it off in full every month.” Selita said. “The use-and-pay repetitive approach will build credit over time.”

Moreover, co-branded retail credit cards offer lower APRs and more perks than single-store retail credit cards – but they also require higher credit scores at application time.

For example, the Amazon (AMZN) store card charges an APR of 25.99%, while Amazon’s co-branded card – the Amazon Prime Rewards Visa Signature card – offers APRs ranging from 14.24% to 22.24% based on the applicant’s creditworthiness.

As of September 2020, retail credit cards with the lowest APRs included the following:

• Military Star Card (10.24%)
• Sears Home Improvement Account (14.4%)
• Costco Anywhere Visa by Citi (15.24%)
• Apple Card (16.49% average)
• Dillard’s American Express Credit Card (17.49% average)

Still, these rates far exceed the Fed’s current interest rate benchmark.

Ted Rossman, industry analyst at CreditCards.com, explained to International Business Times the link between the central bank’s interest rates and rates charged by retail credit cards.

“Ever since the [Credit Card Accountability Responsibility and Disclosure Act, or CARD] went into effect in 2010, most credit cards have had variable rates tied to the prime rate -- which moves in tandem with the federal funds rate,” he said. “That’s because the CARD Act limited issuers’ ability to change rates except when tied to an underlying index.”

The prime rate, as reported by The Wall Street Journal's bank survey, is a widely used benchmark in setting rates for home equity lines of credit and credit cards. The WSJ Prime Rate is currently 3.25%.

“That said, we tend to focus on rates for new customers in our research,” Rossman added. “So while an existing customer might have seen his or her rate fall 175 basis points over the past year in line with the Fed’s cuts, new customers may not receive that benefit as issuers build in additional margin. They’re worried about risk, of course, given all the uncertainty about the economy and jobs. That’s what’s happening, especially at the top of the retail card APR list.”

Rossman further noted that even if an existing credit cardholder saw his or her rate fall from 29.99% to 28.24%, they would hardly notice because that’s “still a very steep rate.”