Key Things to Consider Before Getting a Store Credit Card
Many people often fall into the trap of getting a store credit card in order to purchase things they need, without fully understanding how store credit cards work and their potential implications. Below are the common traps of store credit cards and things you should consider before taking one on:
Interest Free Periods
The biggest temptation of store credit cards is that they usually offer a fixed amount of time that doesn’t accumulate interest (or even, no repayments are needed for so many months). This is a great way, if you manage your money and repayments well, to double-down on payments during the interest free period so you can pay it all (or, the majority) of it off during this period without paying interest – saving you a good amount of money in the long-run.
The Trap: People can fall into a false sense of security and delay their payments over the ‘no repayments’ period, whilst leaving the majority of their debt to pay over the interest-accumulating period. While this can be tempting, you’ll end up spending more money in the long-run during the interest period without taking advantage of the interest-free offer. We always say: borrow the least amount possible, for the shortest possible time. We advise people to only purchase one thing at a time, get it paid off, then close your account. This means for the next thing you need to buy, you can start a new account under another interest-free offer – rather than buying everything all at once and pushing it out for longer (into the interest period).
Interest Rate Spikes
With store credit card offers, interest rates can spike. Because most store credit cards offer an interest-free period, that is your time to pay off all your debt (or at least as much as you can manage), because once you reach the interest-accumulating period you are subject to rates change.
The Trap: Store credit cards usually have some of the highest interest rates of any credit cards in NZ, which can be a trap in itself if you are only making the minimum repayments. Avoid this trap by taking advantage of the interest-free period, and making sure you are paying more than the minimum repayments to counter any interest rate spikes. You may end up finding that the interest rate on your store credit card balance might actually negate the savings and you’ll end up owing more than the cost of the purchase in the first place.
Store credit cards often offer tempting discounts and exclusive cardholder rewards that are designed to encourage you to spend more in-store. While these reward schemes can be very tempting and often seem to come at a time when you ‘need’ to purchase things, you can end up with more issues than what the rewards are worth.
The Trap: If you tend to shop regularly at a store, you may well benefit from their rewards programmes in the long-run, however you need to manage your credit to ensure you’re staying within your means. Avoid buying items just to receive the discount without considering how it might stress your future finances. Take enticing offers with a pinch of salt and carefully consider the repayments in the long-term (including interest) to ensure you can manage the obligation.
If you are looking into getting a store credit card, there are other options you may want to consider that may benefit you better in the long-run. We invite you to chat to our team about your needs and see what we can offer you to achieve your financial goals.