In an attempt to boost earnings amid a period of weak sales, many of the biggest American retailers and their bank partners raised interest rates on their store-branded cards to all-time highs in the months prior to the Federal Reserve starting to lower rates.
According to a study by Bankrate.com that looked at the top 100 shops in the country, at least 50 businesses, including Big Lots, Gap, Petco, Burlington, Macy’s, and TJX Companies, raised the annual percentage rate (APR) on their credit cards between September 2023 and September 2024.
Big Lots, a bankrupt home goods business, increased its annual percentage rate (APR) by 6 percentage points, from 29.99% to 35.99%. This was the biggest rise among the merchants that Bankrate examined. With a 5 percentage point boost on its Banana Republic, Athleta, Old Navy, and namesake cards, Gap made the second-largest increase. With a gain of 4.5 percentage points, Petco came in third.
With an astounding APR of 35.99% as of September, Big Lots, Academy Sports, Burlington, Michael’s, and Petco are tied for the highest APR among the businesses Bankrate monitored.
Ted Rossman, senior industry analyst at Bankrate, told CNBC that few credit cards risked to go above 30% prior to the Fed’s rate-hiking cycle in 2022 and 2023. However, in recent years, they have risen steadily as the Fed raised interest rates by five and a quarter percent, making 29.99% no longer the top end. We now observe that these retail cards frequently charge more than 30%.
But monetary policy isn’t the only factor driving up APRs. In order to safeguard their earnings when the federal funds rate, which sets their own interest rates, decreased, many retailers and their bank partners increased interest rates on their store cards just before the Fed started its rate-cutting cycle in September.
Just before the holiday shopping season, when the majority of customers apply for store cards, the average interest rate on a store card is at an all-time high. Rossman advised customers to reconsider before applying for credit card debt as it reaches all-time highs and delinquencies reach levels not seen since 2011.
Take a deep breath if you are offered one of these this Christmas season. “If you’re going to carry a balance, I would simply say no,” Rossman remarked. That works for you if you pay it off immediately and receive the benefits. However, we frequently hear of people applying for these cards without even understanding what they are getting themselves into.
Jasmine Matheney, a 35-year-old Michigan small business owner, experienced that when she applied for her first retail credit card at Nordstrom shortly before Christmas at the age of 18. After being set a $5,000 restriction, she quickly spent it all, buying expensive presents for her loved ones and new outfits for herself.
I lost my mind. I purchased everything. I was unaware that there would be fees associated with repaying this, honey. In an interview, Matheney said, “So in the end, I end up defaulting on that account.” It led to a flurry of issues for me.
After her Nordstrom debt went into collections, Matheney had to spend years repairing her credit.
Regarding the record-high rates, Matheney stated, “It just goes to show you know how their greed is affecting them.” They entice you with the promise of a 40% discount if you purchase this card, but what happens if you wind up with a balance? You simply paid that forty percent back and more.
Profit padding and hedged bets
The prime rate, which fluctuates according to the Federal Reserve’s rate, is the index to which the majority of credit cards are linked. The amount of interest that a retailer’s bank partner can charge consumers often drops in tandem with the central bank’s federal funds rate. Many card issuers upped their rates in anticipation of the Federal Reserve’s projected rate cuts rather than waiting for that profit to decline.
When a customer pays interest or a late fee on a branded card, the stores and their banking partners usually split the profit.
Prior to the Federal Reserve’s first interest rate drop in four years on September 18, all of the retailers that CNBC examined raised their rates. When the prime rate remained unchanged and the market became more confident that the Fed would start loosening monetary policy at its September meeting, the corporations raised rates.
While the average traditional credit card rate grew by 0.08 percentage points between September 2023 and September 2024, retail credit card annual percentage rates climbed by 1.52 percentage points on average.According to Bankrate data, the sharp rise in rates is specific to store cards.
Additionally, from November 4, 2022, and September 2023, the average annual percentage rate (APR) on a store card increased by 2.21 percentage points. Retailers increased rates by an additional 0.71 points when excluding the Fed’s 1.5-point rise that was in effect at the time. That accounted for less than half of the store card interest rate increase that occurred between September 2023 and September 2024, during which time the federal funds rate remained unchanged.
The businesses that responded to CNBC’s request for comment gave evasive answers when asked why they raised the annual percentage rate (APR) on their store cards, citing current economic conditions and industry norms.
To make sure that APR adjustments are done sensibly and in accordance with general industry standards, we collaborate closely with Comenity Bank, our banking partner. According to a Big Lots representative who talked to CNBC, “Our objective is still to enable our customers to buy what they need and pay over time, ensuring they have access to essential items without financial strain.”
For additional comment, the spokesman directed CNBC to Comenity. The bank stated that a number of variables, such as past federal rate hikes, a rise in credit losses, and regulatory constraints, are to blame for the interest rate hikes that were implemented earlier this year throughout the financial services sector.
In addition to highlighting the advantages of its credit card program, a Nordstrom spokesperson stated that the company is always working to streamline its credit card pricing structure.
According to the spokesperson, our pricing structure is based on a variable rate model that is tied to the prime rate. This change guarantees that we continue to provide competitive rates in comparison to other retail card programs and stay in line with the state of the economy. Our prices are still comparable to those of co-brand cards in a similar position, even with the rise.
The timing and extent of the store card interest rate increases, however, point to a more obvious justification for the adjustments: profitability.
According to Bankrate’s Rossman, store cards are very popular. They may serve as profit centers as well.
He pointed to a 2023 report by Citi analyst Paul Lejuez, who found 49% of Macy s operating profits in 2022 came from its credit card program.
Additionally, Macy’s financial performance this year seems to have been enhanced by higher interest rates.
In May, the company raised its full-year outlook for credit card revenues due to better-than-expected profit share resulting from higher balances within the portfolio, finance chief Adrian Mitchell said on a call with analysts. In August, Mitchell said that consumers were keepingcredit card balancesfor longer, which boosted revenue a little bit better than our expectations.
Some retailers, such as Macy s, Nordstrom and TJX, have since passed on the 0.5 percentage point cut that the Federal Reserve implemented in September to cardholders. Still, their APRs are at record highs, sitting between 2 and 2.25 percentage points higher than they were a year ago.
While that may be bad for consumers, it s welcome news on Wall Street. Store cards just aren t as popular as they once were, which means retailers need to make more off the customers they still have.
New account openings for private label cards have fallen in seven of the past eight years, according toEquifax. Many shoppers, especially those who are younger, are opting for services such as buy now, pay later instead.
Considering that credit card delinquencies are at their highest levels since 2011, it makes sense that interest rates are increasing on cards that are typically pretty easy to get. But as of the end of July, only 14% of private label cards were issued to consumers with subprime credit. Further, more than half of new accounts belonged to people with credit scores over 700, according to an October Equifax report.
Plus, retailers didn t selectively raise interest rates on customers with bad credit. Even those with strong credit scores, such as Macy s customer Brian Robin, were saddled with higher rates.
Considering that I ve never missed a payment on their card, and I always pay more than the minimum on it, this just absolutely came out of left field, and it was completely unwarranted, Robin, a 59-year-old public relations professional in Southern California, said of Macy s decision to increase its APR.
My credit score is 744, so it s not like I m a default risk or anything … It makes me less interested in shopping at Macy s. I mean, think about it for a second. Why would you want to shop at a place that s charging you loan shark rates?
Additional reporting by CNBC s Stephanie Landsman.
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