The Amazon Prime Rewards Visa credit card just added a major perk — but it still presents a minefield for unsuspecting consumers.
Consumers who the Amazon Prime AMZN, +1.39% card, as it’s commonly known, can now receive 5% cash back on purchases made at Whole Foods, the companies announced Tuesday. And that’s changed the calculus for many when it comes to deciding whether or not the credit card is a worthwhile investment.
The Amazon Prime card has some major drawbacks
While the Amazon Prime card’s rewards are enticing, there’s a catch — as there is with most store-brand credit cards. The Amazon Prime card carries a relatively high interest rate, much like other store brand cards.
The APR for the Amazon Prime card will vary between 15.49% and 23.49%. That’s potentially lower than other retailers — retail cards from Kohl’s KSS, -1.89% and Bloomingdale’s M, -2.32% can have upwards of 23% APR, per Consumer Reports. But it’s higher than more traditional credit cards, particularly those that come with 0% APR introductory offers. For instance, the APR on the Capital COF, -1.08% Quicksilver Cash Rewards card and the Citi C, -0.47% Double Cash card can be below 15% following the 0% intro period.
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Store cards generally will have a higher interest rate because they’re designed to be open to a wider range of consumers, said Matt Schulz, senior industry analyst at CreditCards.com. “These cards can be easier to get,” he said. “But these cards have higher interest rates because banks have to protect themselves from the extra risk involved in giving these cards to a wide swathe of the credit spectrum.”
The Amazon Prime card has some major benefits…
The Amazon Prime card stands out in a few ways when compared with other store cards. While it fetches the highest cashback reward (5%) when used at Amazon or Whole Foods, it can be used for purchases anywhere. Cardholders can get 2% when they use it to pay at restaurants, gas stations and drugstores, and 1% back for all other purchases.
Some consumers opt to get store cards when they’re first starting to build their credit history, since they’re so easy to get. That approach can be a sound one for a spendthrift, but for someone who is prone to overspending when they spot a discount, retail credit cards can become a major liability. “It doesn’t make sense to pay 25% in interest to save 15%,” Schulz said.
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…but loyal customers could fall into the same trap
Other stores do allow their cards to rack up rewards for any purchases, but many only allow the card to be used at their stores. That’s the case, for instance, with Target’s Red Card, which offers 5% back on purchases made at Target TGT, -2.96% and other discounts.
But the bigger differentiator is where the rewards can be used. Most store cards restrict their rewards to in-store purchases. For example, a Costco COST, -1.80% member can rack up plenty of cashback with his/her Costco Anywhere Visa V, +0.13% card, but they can only use it in Costco stores toward purchases. With the Prime card, rewards can be used within Amazon, but consumers can also get cash back, gift cards and discounts on travel through Chase’s JPM, +0.03% rewards portal.
There’s also no annual fee. Granted, consumers have to pay $99 per year to become Amazon Prime members to get the credit card. Altogether, these benefits make the Amazon Prime card potentially worthwhile, even when compared with more general credit cards. “If you’re somebody who shops at Amazon regularly, the Amazon Prime card is pretty hard to beat,” Schulz said.
Who should — and shouldn’t — consider a store-brand card
Consumers should have a strong understanding of their spending habits whenever they open a new credit card. Consumers who tend to carry a balance should steer clear because of the higher interest rates, said Kimberly Palmer, credit cards expert at personal-finance site NerdWallet. Plus, if consumers aren’t particularly loyal to a given retailer, a store card may not make much sense.
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“If you are carrying any debt or you like the flexibility of comparison shopping, you may want to look for a more general credit card,” Palmer said.
Consumers shouldn’t make an impulse decision at checkout. Furthermore, shoppers shouldn’t open too many credit cards in quick succession, as that can ding their credit score.
But if consumers did have a moment of weakness and opened a new card, they probably shouldn’t close it, said Tim Devaney, credit cards staff writer at personal finance website Credit Karma. Opening these cards will expand a consumer’s credit utilization ratio — which gauges how much of their available credit they’ve spent. With more credit available, that ratio will be lower, which can improve their score.
“If they have an annual fee and you’re not using the card, then you might want to consider closing it,” Devaney said. “But if you’re not paying an annual fee, keep it open.”