CreditCards.com survey: Retail credit cards boost rates, cut rewards

Retailers' cards go delinquent more often, so their terms become harsher

By Tamara E. Holmes

Once known for offering instant savings and incentives to keep customers shopping, retail credit cards have scaled back rewards in favor of higher rates, lower limits and closed accounts, according to a CreditCards.com survey of 37 leading retail cards.

Consumers have long been warned to be cautious with store credit cards since they typically come with higher interest rates and discounts that promote impulse spending. This year, many of us seem to be heeding that advice, with the National Retail Federation reporting that consumers are favoring cash to pay for purchases. That trend is not surprising given the less-consumer-friendly terms that characterized retail credit card offerings in 2009. (See CreditCards.com's 2009 retail credit cards chart.)

This year was tough for all credit card companies, but retail credit card issuers experienced greater losses than general purpose credit card issuers, says Meghan Neenan, senior director of New York-based Fitch Ratings, which tracks retail credit card losses. In October alone, the charge-off rate on retail credit card losses was 11.75 percent, compared to 10.75 for general market cards, Neenan says.

Bad news for card issuers has meant bad news for cardholders. While in recent years, store card issuers rolled out rewards programs designed to entice shoppers through savings and discounts, this year issuers have been focusing more on reducing the level of risk in their portfolios, cutting their losses by cutting access to credit.

A perfect storm
Not only were card issuers concerned with the faltering economy, but they had the Credit CARD Act of 2009 to contend with. Beginning in February 2010, the law will limit their ability to raise interest rates and fees on future balances. In preparation for the changes, many have been adjusting rates upward and "re-pricing their portfolios," Neenan says, leading to even more unfavorable changes for consumers.

"All the card issuers have taken drastic steps over the last year in underwriting," says Neenan. "They pulled back on growth, and they pulled back on credit lines."

Even in good economic times, store credit cards are likely to have higher interest rates than general-market credit cards because they tend to be the first bill consumers will default on, making them a riskier form of debt. "If I don't pay my bill at a retail chain, I just can't shop or I'll be uncomfortable shopping in that store chain," says Robert Hammer, founder of R.K. Hammer Investment Bankers, a bank card advisory firm in Los Angeles. "But if I'm delinquent on my MasterCard or Visa, I can't use it anywhere in the world, so who do you pay last?"

That tendency to default first on retailers' cards has held true, even as the market has changed, and many retailers' cards became more widely accepted. Many of today's retail credit cards have three parties involved: the retailer, the card issuer and the network. The retailer will partner with a bank to issue the card, rather than enter the banking business itself; the bank then often has a "co-brand" partnership with a payment network such as MasterCard and Visa, letting consumers use the card anyplace that accepts cards in that network.

In 2009, retailers faced a double whammy: Consumers were both reluctant to buy and hesitant to pull out their credit cards. With their stores' bottom lines were pinched by the economy and their banking partners in worse shape, credit card rate increases became as common as a President's Day sale.

CreditCards.com survey
CreditCards.com surveyed 35 retailers' credit cards in 2008 and 37 retailers' cards in 2009. Of the cards surveyed both years, 19 retailers raised their interest rates in the 2009 survey.

The changes were felt by both bargain and luxury shoppers alike. For example, Wal-Mart's interest rate for its co-branded credit card last year ranged from 11.87 percent to 20.87 percent, whereas this year, it ranged from 13.9 percent to 22.9 percent. On the other side of the spectrum, the minimum APR for Saks Fifth Avenue's co-branded offering was 11.99 percent in 2008 compared to 15.99 percent this year.

AFTER A TUMBLE, RETAIL CARD USE STABILIZING
The market for store credit cards is expected to pick back up after it fell $4 billion from 2007 to 2008, according to the market research firm Packaged Facts. Use is expected to rise in 2010, reaching $114.1 billion.

While many consumers saw their interest rates rise, others saw their accounts closed. Some companies, like Nordstrom, let cardholders know that their accounts would be terminated if they didn't use them, says Hammer. Others simply shut down inactive accounts, giving customers no choice in the matter. Still other accounts were closed when retailers such as Circuit City declared bankruptcy (though cardholders with balances still had to repay their debts).

Regardless of the reason, closing an account can potentially hurt cardholders since a credit score is partly determined by the credit utilization ratio -- the amount of debt owed in relation to total credit availability. "If you start closing credit card accounts, it will bring down your available limit and it could make your limit to balance ratio above 50 percent, possibly harming your score," says Dorothy Guzek, a certified financial counselor with Troy, Mich.-based GreenPath Debt Solutions.

Even if cardholders didn't experience rate increases or lowered credit limits, they likely saw a change in the quality of rewards and perks that come with their accounts. "The rewards are still out there, but they're not as rich as they used to be," says Hammer. For example, Barneys last year offered cardholders 3 percent back on everything spent up to $4,999. This year they cut that back to 2 percent. Last year, Kroger offered cardholders three points to go toward free groceries for every dollar spent on Kroger brand products. This year, that was scaled down to one point per dollar.

Benefits for some
Despite the changes, some cardholders can still reap financial rewards from store credit cards if they use them right. "For people who pay their bills timely, track their expenses and know what they can afford, store cards can be a good thing," says Guzek. Often cardholders receive exclusive discounts or special savings. Of course, shoppers must pay the entire balance each month so interest doesn't offset those savings, Guzek adds.

Store credit cards can also provide flexibility to those who are buying costly items such as appliances. For example, cards sometimes offer a period of no-interest payments such as six months or a year. Those types of deals can be of benefit to consumers as long as they can afford to pay for the item during the promotional period before higher interest rates kick back in, Guzek says.

Though retail credit card issuers are beginning to see fewer charge-offs, says Neenan, consumers shouldn't expect to see better credit terms any time soon, and retail card issuers will continue to be stringent with their lending requirements in the near future. "The year 2010 is going to be tough for us in banking and in credit cards," predicts Hammer.

That means the savviest shoppers will use retail credit cards as a savings tool, getting deals and discounts for items they can pay for immediately. Those who carry a balance will continue to pay more for the privilege. "Everyone needs to know their budget and that's going to help them to understand whether they have money for future card payments," says Guzek. "And if they don't, they shouldn't be charging, bottom line."

How going to jail impacts your credit

Credit card issuers don't automatically learn of your woes or shut your account

By Jeremy M. Simon

Credit Score Report

Jeremy M. Simon covers credit scoring and other issues as a staff reporter for CreditCards.com. Ask a question. 'Credit Score Report' stories

Dear Credit Score Report,
My brother is serving an 18 month sentence. He has no credit card debt (paid before he started his sentence), and the cards aren't being used. Will inactivity affect his score? -- Concerned Sibling

Hey Concerned Sibling,
Even if your brother doesn't use his credit cards during the time he is behind bars, his credit score shouldn't be damaged solely by inactivity.

Inactivity alone doesn't hurt a cardholder's credit score in the short term, since existing credit history data will continue to help generate a credit score. Several banks confirmed that they continue to share existing account information with the credit bureaus -- Equifax, Experian and TransUnion -- as long as the accounts remain open. And as long as the credit bureaus have that information, they will, in turn, share it with credit scoring companies, such as FICO.

"A card that is open and carries a zero balance will just be reported as current for three years," says Experian spokeswoman Danica Ross. "As long as the card is open, lenders are obligated to report updates on the account." Since your brother's sentence is for 18 months, he will be out of jail well before his account information would stop being shared.

The real threat to your brother's credit score comes from the possibility of an account closure. His card accounts could be closed due to the banks' policies about imprisoned cardholders. Citi, for example, says it will close a credit card account once that issuer learns the cardholder is incarcerated. However, experts say information about an incarceration won't come from a credit report.

"I can tell you that credit reports do not include criminal arrest or incarceration records, so there would be no indication as to why there was no activity," says Experian's Ross.

Even so, you may want to call his bank and (anonymously) inquire about their policy regarding imprisoned cardholders, just in case.

Of course, you don't have to be in jail to have your credit card account closed. In the current economic environment, banks are closing accounts on all sorts of cardholders. As unemployment continues to rise, issuers have been canceling credit cards -- both used and unused -- in an effort to control the amount of credit available to borrowers. That's because consumers who eventually run into financial trouble could potentially default on their loans and cause banks to lose money. Whether or not the cardholder is behind bars, the decision to keep accounts open is the individual issuer's. "The closure of accounts is at the discretion of the lender," says Peter Garuccio, senior director of public relations with the American Bankers Association. "We don't force banks to lend money to anyone."

If one of your brother's accounts is closed or a credit line reduced, it could increase his utilization ratio. That's the comparison between existing debt and total credit access -- and a factor in determining credit scores.

Whether the banks close your brother's credit cards due to his incarceration or simply because they are limiting their risk levels, you can still help him generate a credit history while behind bars by adding your brother as an authorized account user on your credit card. Then continue to use your credit card and pay it off each month, adding positive payment information to your brother's credit history. "If attempting to maintain good credit scores while incarcerated, a family member could add the incarcerated individual as an authorized user to stimulate credit activity," says Bank of America spokeswoman Anne Pace.

If you don't let yourself worry -- and you add your brother as an authorized user on your card account -- you've done all you can. Meanwhile, the fact that your brother paid off his debt before going to prison bodes well for his continued responsible credit use after his release.

Good luck!