It’s getting more expensive to borrow, but that isn’t stopping holiday shoppers from racking up their credit card debt.
Approximately 35% of Americans are expected to rely on retail credit cards this holiday season, a LendingTree survey found, as cash-strapped buyers seek alternatives to stretch their budgets. That’s up from 29% a year ago and the second-highest percentage since 2020.
The sharp uptick comes as the average credit card interest rate for retail cards – which typically carry higher interest rates than regular cards – hit a high of 26.60%, up from 25.27% a year ago. According to LendingTree, it also comes as more and more retail giants are upping their store card interest rates past 30%.
“Over the years, 30% has kind of been a kind of an unofficial ceiling for credit card rates for most credit card issuers,” Matt Schulz, chief credit analyst at LendingTree, told Yahoo Money. “It's eye-opening to see a bunch of cards go over that number. It's especially interesting when the nation's biggest grocery store chain is one of them.”
Just this month, nearly half a dozen retailers, including Kroger, Wayfair, Macy’s, Bloomingdale’s, Shell, Exxon Mobil, and Speedway have raised their maximum APR past the 30% threshold. According to Schulz, the hike in rates was “inevitable” given the Federal Reserve's interest rate hikes — that variable credit card rates track — to curb inflation this year.
Still, higher rates haven’t spooked buyers yet.
“I’m a little surprised that the interest in store credit cards has rebounded the way it has,” Schulz said. “It shows that people are looking for whatever help they can find to help them make ends meet in the face of all this inflation. Store cards may not be the greatest option for folks, but in some cases, they can be the best of a bunch of otherwise bad options.”
Store credit cards could supplant buy-now-pay-later (BNPL) products that skyrocketed in popularity during the pandemic. Just over 3 in 10 Americans (31%) said they were at least considering using a BNPL loan this month, according to a separate survey from LendingTree.
That could be because some inflation-weary Americans are worried BNPL loans could limit their cash flow in the months to come, because they often carry shorter repayment timelines compared with store credit cards.
Buy now, pay later (BNPL) programs were an instant hit, allowing shoppers that are often ineligible for credit cards or had thin credit histories to pay for big-ticket items in pre-set installments. Unlike store credit cards, BNPL rarely charges interest fees or late fees, which are also attractive to buyers on a budget.
“Buy now pay later certainly played a role in steering some people away from store credit cards, and they can be great, but they don't give you that much extra time to pay off that loan,” Schulz said. “A store credit card can give you a little bit more time basically needed. Unfortunately, a whole lot of people around the country are going to need a little more time than usual this holiday season.”
While interest in store credit cards is rebounding, for some shoppers taking out a store credit card has become more of a headache.
At least 37% of Americans said they regret getting a store card, LendingTree found, including 14% who said they’ve regretted the decision several times. While extra cash and discounts may sound like a solid deal at checkout, store credit cards can do more harm than good if used irresponsibly.
“Retailers want to be able to offer their store credit cards to anybody who comes up to the checkout counter. And that means they need to have higher interest rates in order for banks to protect themselves,” Schulz said.
So, before signing up for a retail credit card, make sure you take a look at the fine print. While most store cards have variable rates, some retailers offer fixed-rate credit cards whose rates don’t move in tandem with Fed rates. According to Schulz, these can be a better choice.
“Store cards generally aren't a great thing to rely on. But if you use them wisely, then they actually can save you a little bit of money and potentially be a good tool,” Schulz said. “But you just have to make sure that you don't carry a balance with them because the interest rate is so high, even by credit card standards.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.
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