With financial institutions pulling back exposure everywhere, it's becoming harder for consumers to get a store credit card. The credit pullback is expected to put a crimp on sales at retail, especially of big-ticket items.
"Credit-tightening will shrink the amount of private label credit outstanding over time, but it will have an immediate impact on retail sales," John Grund, a partner at First Annapolis, an advisory firm focused on the payments industry, told The New York Times. "Consumers need financing to buy merchandise, especially big-ticket items, and issuers can cut too far to reduce loss exposure, making the recession even more problematic."
The cards are often used by those with fewer credit options and frequently finance items like appliances, furniture and jewelry. Mr. Grund estimated that 30 to 40 percent of department store sales went on private label cards.
The Times article notes that while some retailers continue to offer the cards at their registers in exchange for a same-day discount, the lenders have made it more difficult to qualify, much as they have done with traditional credit cards.
The article in the Times noted that General Electric, the largest issuer of private label cards that includes Wal-Mart and Lowe's, last year attempted to sell the business. The second largest, Citigroup, which lends on behalf of retailers like Macy's and Sears, recently listed its unit as one of its non-core asset. Two of the larger retailers that still operate part or all of their own card businesses, Target and Nordstrom, have tightened their lending standards.
Losses on the private label cards reached a three-year high of 10.51 percent in January, according to Fitch Ratings, up 44 percent from a year ago. That compares with general credit card losses of 7.5 percent, up 40 percent. Fitch, which tracks receivables issued by banks on behalf of retailers, expects private label card losses to surpass 12 percent by midyear and losses on general cardholders with solid credit to reach eight percent.
"Credit quality will continue to deteriorate for general-purpose cards, and at a rapid, more urgent pace for retail cards," Michael Dean, managing director at Fitch, told the Times.
Discussion Questions: How will the efforts to reduce exposure to store credit cards impact retail sales? What other expected fallout from the tightening credit standards could be expected? How should retailers be addressing the situation?