In the 12 months leading up to September 2024, major U.S. retailers have drastically increased the interest rates on their store-branded credit cards. This trend, which unfolded even before the Federal Reserve began lowering its benchmark rates, has sparked concern among consumers and financial experts alike. Companies are using these hikes to protect profits during sluggish sales periods, but the impact on shoppers could be severe.
Big Retailers Lead the Charge on APR Hikes
According to a recent study by Bankrate.com, 50 out of 100 top U.S. retailers — including household names like Big Lots, Gap, Petco, Burlington, Macy’s, and TJX Companies — raised their annual percentage rates (APRs) on store cards. Some of these increases were substantial:
- Big Lots raised its APR by six percentage points to 35.99%, the highest hike in the study.
- Gap increased rates for its Banana Republic, Athleta, Old Navy, and Gap cards by five percentage points.
- Petco followed closely with a 4.5 percentage point hike.
As of September 2024, the highest APRs — a staggering 35.99% — were seen on cards from Big Lots, Academy Sports, Burlington, Michaels, and Petco.
Why Are Store Card Rates So High?
Store-branded credit cards have long been known for their steep interest rates, but recent trends have amplified this issue.
Ted Rossman, a senior analyst at Bankrate, attributes the surge to Federal Reserve rate hikes in 2022 and 2023. “Before these hikes, rates over 30% were uncommon,” Rossman explained. “Now, it’s standard, with some cards nearing 36% APR.”
Retailers aren’t just reacting to past rate hikes; they’re also preparing for future challenges. As the Federal Reserve begins lowering rates, many companies are preemptively raising APRs to offset potential profit losses.
The Impact on Shoppers
These rate hikes come at a precarious time for consumers. Credit card debt in the U.S. has reached record levels, and delinquencies are at their highest since 2011. With the holiday shopping season approaching — a time when store credit card sign-ups traditionally spike — experts urge caution.
“If you can’t pay off your balance in full each month, these high APRs will quickly outweigh any discounts or rewards,” warned Rossman.
Retailers’ Motivation: Profit Over People
The primary driver behind these APR increases is clear: protecting profits. Retailers and their banking partners often split revenue from interest and late fees on store cards, making these programs a lucrative source of income.
For example, Macy’s credit card program accounted for 49% of its operating profits in 2022, according to a Citi analysis. By 2023, profits from credit card customers carrying balances had surpassed expectations.
While a few retailers, like Macy’s and Nordstrom, passed along the Federal Reserve’s September 2024 rate cut, their APRs remain significantly higher than they were a year ago.
Store Cards Losing Ground to “Buy Now, Pay Later” Alternatives
Despite aggressive interest rate hikes, store-branded credit cards are becoming less popular. New account openings have declined in seven of the last eight years, as younger consumers turn to flexible "buy now, pay later" (BNPL) options.
To counteract this shift, retailers are charging higher rates on existing accounts. Surprisingly, these hikes are affecting even those with excellent credit scores. Over half of new store card accounts now belong to individuals with credit scores above 700.
What Shoppers Should Know
The rise in retail credit card APRs highlights the risks of using store-branded cards, especially for those who carry balances. While the allure of discounts and rewards can be tempting, the financial pitfalls of high interest rates are substantial.
To avoid costly mistakes, consider these tips:
- Pay in Full: If you must use a store card, aim to pay off the balance every month to avoid accruing interest.
- Read the Fine Print: Before signing up, understand the card’s APR, fees, and terms.
- Explore Alternatives: Look into general-purpose credit cards with lower APRs or consider BNPL services for big-ticket purchases.
Without careful management, store-branded credit cards can turn what seems like a great deal into long-term financial strain.
As retailers continue to prioritize profit through record-high APRs, consumers need to remain vigilant. Understanding the true cost of store-branded credit cards is essential for making informed decisions. With credit card debt soaring, now more than ever, shoppers must weigh the benefits of rewards and discounts against the risks of mounting interest payments.
Source: www.cbnc.com
