American families are expected to spend anywhere between $850 and $1,700 during this year’s holiday season – about $1.6 trillion overall – and while it may be tempting to save some money by using a TJ Maxx, Walgreens or Wayfair credit card, financial experts warn that retail credit cards can cost more than they’re worth.

The average store-only credit card charges a hefty 30.24% interest rate, and co-branded credit cards – those that pair a bank credit card with a retailer – charge 27.64%, according to a new report from Bankrate, a consumer financial services company. Both figures reflect a roughly 2% rate hike from last year and are well above the 20.71% average for all credit cards.

And as the holiday shopping season ramps up – some major retailers rolled out Christmas merchandise as early as July and August – so does the credit card balance.

The National Retail Federation expects consumers to spend about $875 on average this holiday season, while Deloitte, an international professional services firm, puts that figure at $1,650.

“You really want to think through it any time you open a line of credit,” said Madisen Corcoran, a senior financial specialist with Avesta Housing’s HomeOwnership Center.

Retail cards in particular tend to have limited uses, being store-specific, and the high-interest rates make them riskier, she said.

She cautioned people to be intentional and not make a big financial decision “on a whim to get 20% off in that moment.”

Ted Rossman, a senior industry analyst at Bankrate, said in a news release that the rates these companies charge balance-carrying consumers have historically been reserved solely for a “deep subprime” audience.

“We used to see 30% as the high end for retail credit card APRs. In fact, 29.99% was an artificial barrier that few dared to cross – for psychological reasons, mostly,” Rossman said. “But the market has blown past that threshold given the Fed’s aggressive series of interest rate hikes over the past year-and-a-half.”

There can be a lot of fine print that people aren’t aware of when signing up at the cash register, and while 15% off may be enticing, many aren’t thinking about what that could mean down the road, said Kelley Glidden, a CASH Maine coordinator and workforce specialist for New Ventures Maine.

If they don’t pay down the balance right away, the interest can start to snowball, she said.

With 30% APR, a person who makes minimum payments on a $1,000 purchase will be in debt for four years and will owe $715 in interest, Rossman said.

SKY-HIGH RATES

According to Bankrate, the highest retail credit card APR is 33.24% on the Academy Sports + Outdoors Credit Card, the Burlington Credit Card, the Good Sam Rewards Credit Card and the Michaels Credit Card.

There are also 16 retail credit cards that charge 32.24% to all cardholders who carry balances, including those from Jared, Kay Jewelers, Zales, QVC, Walgreens, Ross, Victoria’s Secret, T.J. Maxx and Wayfair.

Many of these cards offer a 0% interest promotion known as “deferred interest,” which means cardholders need to pay the entire balance by the end of the term to avoid interest charges. If they do not, they’ll be charged all of the interest that would have accumulated from the beginning of the period. According to Bankrate, this is common on retail cards but not traditional credit cards.

Derek Tharp, an associate professor of finance at the University of Southern Maine, said the sky-high interest rates on credit cards is just a reflection of risk.

“Unlike a mortgage or auto loan that is secured by a physical asset that could be collected if payments aren’t made, credit cards are generally unsecured loans that leave nothing for the lender to collect in the event that a borrower doesn’t make their payments,” he said.

IMPACT ON CREDIT SCORE

It’s not just the interest rates that carry risks.

“I often caution people specifically about retail credit cards because they are in your face and seemingly easy to access, but they do involve a hard credit pull, which does impact a credit score,” Corcoran said, referencing the immediate scan of a consumer’s credit history before awarding the card at the checkout register. Excessive credit pulls lower a person’s credit score.

The cards also aren’t viewed as favorably as traditional bank credit cards, so in situations where opening a new line of credit could actually be beneficial, a retail credit card likely won’t do the trick.

Still, the cards are relatively common. Corcoran didn’t have any concrete data but said she sees them on a fair number of the reports she works with. Kohls cards are especially popular.

With any credit card, it’s best not to carry a balance at all and to pay off the card each month, but of course, that’s easier said than done, she said, especially when the cost of living is at an all-time high.

The average credit card balance in Maine was $4,538 in 2021 and that rose to $5,078 in 2022, an 11.9% increase, Experian reported. That’s just slightly lower than the national average of $5,910.

“We’re seeing a lot more people in general because people are facing tighter budgets, they’re facing more financial hardships,” Corcoran said. “People are utilizing credit more to make ends meet or fill gaps in their budget.”

Credit cards in general can encourage overspending, Tharp said.

“If it’s holiday season and I’m buying gifts for my family, paying cash or using a debit card forces me to not spend more than I have. If I don’t have the funds in my wallet or my account, I can’t buy it,” he said in an email. “However, credit cards make it easier to spend more and to spend funds that we do not have, so it’s much easier to overextend ourselves and then end up paying a lot of interest.”

But despite the risks, for people in good financial standing, a retail card can be beneficial.

“If someone pays off their bill in full every month, is careful not to overextend themselves by buying on credit instead of paying cash, and they happen to shop a lot at one retailer, then a retail credit card can make sense to take advantage of the higher cash back or discounts on store merchandise than they would earn on a general credit card,” Tharp said.

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