These credit cards have had ‘increasingly notable’ high rates, analyst says. What to know before you shop

As the average interest rate on retail store credit cards near 30%, many holiday shoppers could be in for even more financial strain this year if they carry a balance.

The average annual percentage rate for merchant cards reached 28.93%, a new record high, up from 26.72% last year, according to new data from Bankrate.

“We’ve seen all types of credit card rates go up in recent years, but store cards have been increasingly notable,” said Ted Rossman, senior industry analyst at Bankrate.

More from Personal Finance:
Sparse inventory drives prices for new, used vehicles higher
More unmarried couples are buying homes together
As mortgage rates hit 8%, home ‘affordability is incredibly difficult’

In the past, 29.99% interest rates were listed on credit cards of all kinds as so-called penalty rates, or the rate an issuer would charge a consumer who was late with payments, said Matt Schulz, chief credit analyst at LendingTree.

“It’s becoming way more common for many credit cards to have that as a possible standard rate,” Schulz told CNBC in a previous interview.

While retail store credit cards can be easier to qualify for, especially for those with lower credit scores or little credit history, experts say consumers should be careful when deciding to open such a high-rate line of credit.

Holiday debt does have a way of sticking around. About 52% of Americans incurred credit card debt while holiday shopping last year, and as of mid August, nearly a third have yet to pay off their balances, according to NerdWallet’s 2023 Holiday Shopping Report.

Yet, about 74% of 2023 holiday shoppers still plan on using credit cards to buy gifts this year, NerdWallet found. 

For holiday shoppers who may consider opening a retail credit card for holiday purchases, it can be smart to do so if a sizable discount is offered or if the purchase is something you or the gift recipient will benefit from in the long-term, said Bankrate’s Rossman. 

Otherwise, shoppers may want to question what effects the transaction will have on their financial future, added Rathner.

Retail credit cards will oftentimes offer a 0% interest promotion described as “deferred interest.” However, if the cardholder misses a payment by mistake or does not pay the balance in full, “these 0% promos could be dangerous,” said Rossman. 

Consumers might see deferred interest offers more commonly in stores where they are more likely to make major purchases, like appliances or furniture, said Rathner at NerdWallet.

With a deferred interest deal, cardholders are given a set amount of time to make payments with 0% interest. If they have not paid off the purchase in full by the end of the period, not only will they earn interest on the remaining balance, they will also retroactively incur interest on the original purchase price, she added.

“If you bought a couch for $2,000 and you still owed $500 by the time the promotion ended, you don’t just owe interest on the $500, you owe interest on the $2,000,” Rathner said.

It’s a “very sneaky” and common tactic on retail cards that’s often buried in the fine print, added Rossman.