The Trouble with Retail Credit Cards

Not as great as they seem on the spot

“Would you like to save $10 today?” In the United States, it seems you can’t shop anywhere these days without hearing this question at the checkout counter. According to Card Hub, there are at least 134 large retailers in the U.S. offering credit cards. And of course, these offers usually sound great. Who wouldn’t want to save money on purchases? All you have to do is fill out a short form on the spot… It’s easy.

These savings can come at a price. Here are a few of my concerns about credit cards offered by the likes of Target, Macys, Sears, TJ Maxx, and others.

  • Confusion between Rewards and Credit Cards – Many retailers provide rewards or loyalty card programs. For instance, you can earn points at CVS with a card or get gas reward points at Stop and Shop. These rewards and loyalty cards are often similar to retail credit cards in that they are offered at the register, you fill out a short form to join, and you present the cards when checking out. For customers with limited financial literacy or limited English language skills, the difference between reward/loyalty cards and retail credit cards can be very confusing. It’s blurred even more by the fact that most credit cards also offer rewards – like cash back or bonus air miles. Of course, there are big differences between a card that one swipes to simply “earn points” and a card that allows one to make purchases on credit.

  • Negative Impact on Credit Scores – Credit scores are extremely important for anyone wanting to get a loan, or buy a car or a home. Though how they’re calculated is based on complex and opaque calculations. However, just having a wallet full of retail credit cards can still negatively affect your credit score. You may be judged a higher credit risk if you have signed up for many retail credit cards – even if you don’t use them – because you have the ability to go on a huge spending spree. What’s more, just having your credit score checked, which happens when you sign up for a card, may negatively affect your credit score.
  • Cashiers Are Not Bankers – If you apply for a credit card with a financial institution, the setting itself prompts many people to ask about and make comparisons on things like interest rates, credit limits, and repayment terms. In fact, there are many websites (see here and here) to help consumers evaluate financial credit cards. The idea behind retail credit cards, however, is to attract decisions based on just one thing: saving money right away at the checkout counter. Obtaining retail credit cards are mostly impulse decisions, and little is done to disclose their terms and conditions. Moreover, if you do have questions about the terms and conditions of a retail credit card, the person you are asking is a store clerk, not a banker.
  • Over-Indebtedness – Despite the sophisticated credit bureau system in the U.S., over-indebtedness is an issue, especially among lower-income populations. Retail credit cards contribute to the problem of over-indebtedness in a number of ways:
    • They are ubiquitous – Everywhere you shop, every time you take a flight, a retail credit card is being offered at checkout or over a loud speaker, with incentives advertised front-and-center.
    • They have high APRs – The average APR on credit cards offered from America’s big retailers is 23 percent – a number that has recently gone up by more than 2 percentage points. For comparison, the country’s average for general purpose credit cards is about 15 percent.
    • They are inconvenient to pay – There is a movement to use technology to make paying bills easier. Yet, the industry lags, with retailers often mailing bills, which can get lost in the shuffle.

Are all retail credit cards a bad idea, and should you never enroll for one? Of course not. But next time you shop you might want to think twice about saving those $10 at the checkout counter. From a client protection perspective, and given that this retail credit trend doesn’t appear to be going away, it’s essential that this corner of the industry puts equal emphasis on fair and responsible practices. For their own institutional sustainability and for their clients’ well-being, retail credit providers — like all credit providers — should incorporate the Smart Campaign’s client protection principles throughout their operations, especially including mechanisms for complaint resolution, transparency, prevention of over-indebtedness, and responsible pricing.

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