Will sky-high APR rates put an end to retailer credit cards?
Higher interest rates and skimpier sign-up offers have reduced the value of retailer credit cards, according to a new study from CreditCards.com.
The study found that the average APR (annual percentage rate of charge) of the top retailers in the U.S. rose to 23.84 percent, much higher than the current national average for all credit cards, 15.18 percent. That rate has risen from 23.43 percent in 2015 and 23.23 percent in 2014.
The highest rates were seen from Big Lots, 29.99 percent; Zales, 29.24 percent; and Staples, 28.24 percent. The lowest were 10.24 percent from Dillard’s and 11.15 percent from Nordstrom Visa Signature, although both also offered rates close to the average depending on credit worthiness.
The high APRs were attributed to lower credit limits, higher-risk applicants and variable rate APRs tied to the prime rate. It tends to be easier for people with weak or young credit histories to obtain cards tied to a specific retailer, often the first card for these individuals.
Still, CreditCards.com said, with the Fed soon expected to raise rates, store card issuers will have to evaluate whether to continue to follow the hikes or look to avoid alienating current and future cardholders with sky-high APRs.
The study also found that sign-up perks have diminished. Only 13 store cards advertise low or zero-percent introductory rate offers. Ten have ditched new cardholder sign-up bonuses since the prior year. The remaining 34 that advertised sign-up offers typically give new cardholders a first-purchase discount, either in dollars or a percentage markdown.
A few cards enable consumers to take advantage of store discounts and other money-saving opportunities on transactions. Meijer’s credit card program, for example, rewards consumers with gas discounts and $10 back for every $750 spent in stores, in addition to cardholder-exclusive saving events throughout the year. The Target REDCard offers free shipping and five percent off all purchases, while the Amazon Prime Store Card also offers 5 percent cash back on purchases.
Discussion Questions
DISCUSSION QUESTIONS: Are store credit cards still a wise strategy for retailers? Should more cards offer incentives tied to regular purchases, like Target’s REDCard?
Poll
BrainTrust
Paula Rosenblum
Co-founder, RSR Research
Kim Garretson
Advisor, MyAlerts
Store credit cards are designed for the impulse shopper with a job. These people are easy marks and it’s a wise strategy for retailers since it is a tool to separate more cash from the consumer’s pocket. Many shoppers are clueless to what APR is. Incentives work but are costly. Target’s REDCard is one of a kind since really no other card can match their discount. Smart consumers will take advantage of every 5 percent or more incentive, exploit all the loopholes and pay off their balance immediately. The worst enemy of a retailer and credit card is an educated, frugal customer.
Ditto.. I pay off all my balances each much, and I buy my cars from my home equity line of credit @3.99% and claim the deduction. My dad always talked to me about finances, and I’m so glad he did.
I am one of the people who established their credit with a store credit card. I think it was a Filene’s card (so dating myself!). As a young professional, I was told these cards were easiest to get, and paying them off regularly would help me create a credit score. I did and it did.
The only other time I bought or used a store credit card was with Macy’s. I was ostensibly getting a deal, but by the time all the charges associated with the card were done I had cost myself more than I saved.
I don’t think I’d do away with the cards … if nothing else, it helps pull in the younger shopper. Other credit cards have sky-high interest rates as well. Eventually we recognize that it’s better to just pay them off monthly than try to manage the charges.
Truth be told, these are just co-branded cards anyway. I say keep them, as I don’t see any harm in having them out there.
If you have a card program then it makes sense to incentivize users to participate in it. The problem, as Paula points out, is that alert customers often realize the card is costing them more than than they thought. So, bottom line, cards are important, but only insofar as they encourage purchase behavior and keep customers loyal and happy. In a tight economy high APR rates remind customers how much it is costing them to do business with you — never a good long-term strategy.
Well we only use the cards for convenience and special deals. We pay cards off in full with each bill — they hate that! Millennials should use the cards, get the perks and pay in full. The consumer can gain if you control the spend.
TRedd
Watch for some retailers with store-branded cards to move to automating their price guarantees. Today, if a shopper finds the retailer has dropped the price on a purchased item within 30 days, they can apply for credit on the difference. With this new innovation, the shopper does not have to do anything. The retailer and its technology partner will monitor price changes and automatically apply credit on price drops. Watch for innovative marketing on this new feature to help with sign-ups and loyalty for card usage.
With other credit cards offering cash back on all purchases or other attractive awards, having separate credit cards for every store does not make sense — what is the value of collecting a pile of credit cards? Unless the retail card offers additional rewards or benefits, there is no value in having and using cards from individual retailers.
As long as companies make money off them, then it makes sense for stores to continue them. Of course with stratospheric rates like these, and practically every retailer in the world accepting the major two (or three or four) cards, it makes little sense for consumers to make use of them, but that’s another issue (one that PT Barnum has covered…).
I used store credit cards to build credit and bought my first furniture and interview wardrobe. Once I got a credit history, the store credit cards went to the wayside, and the rewards credit cards made store credit cards obsolete for me. There will always be a place for high interest rate store cards for those with new or bad credit that need to finance purchases.