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Dozens of major U.S. retailers and their bank partners are pushing interest rates on their private-label cards to record highs in the months before the Federal Reserve began cutting interest rates, seeking to inflate profits amid continued slumping sales. raised to.
At least 50 companies including: big lot, gap, petco, Burlington, Macy’s and TJX companies — Annual interest rates on credit cards increased between September 2023 and September 2024, according to a review of data collected by Bankrate.com surveying the nation’s 100 largest retailers.
Big Lots, the bankrupt household goods chain, raised its APR by six points, from 29.99% to 35.99%. This was the largest increase among retailers surveyed by Bankrate. Gap had the second largest increase, with Banana Republic, Athleta, Old Navy and its namesake cards increasing by 5 percentage points. Petco ranked third with an increase of 4.5 points.
big lot, academy sportsBurlington, Michaels, and Petco are tied for having the highest APR of the companies tracked by Bankrate, at an impressive 35.99% as of September.
“Until the rate hike cycle confirmed by the Fed in 2022 and 2023, 30% was a threshold that most credit cards were not willing to cross,” Ted Rothman, senior industry analyst at Bankrate, told CNBC. he said. “But in the last few years, interest rates have gone up even higher from their highs. All of a sudden, 29.99% is no longer the ceiling because the Fed raised rates by a quarter of a point. Now, at these stores, it’s very You’ll find that it’s common to charge at least 30% on your card. ”
However, monetary policy is not the only factor pushing up annual interest rates. Just before the Fed began its rate cutting cycle in September, many retailers and their bank partners raised interest rates on store cards to protect profits when the federal funds rate, which sets their own interest rates, was cut. .
Currently, average interest rates on store cards are at record highs ahead of the holiday shopping season, when most consumers sign up for store cards. With credit card debt reaching new highs and delinquencies reaching levels not seen since 2011, Rothman warned consumers to think twice before signing up.
“If you’re offered one of these this holiday season, really take a breath. If you’re going to be carrying a scale, I’d say no,” Rothman said. “If you pay it off quickly and get the rewards, that’s all well and good. But we often hear that people sign up for these cards and don’t even realize what they’re getting.”
That’s what happened to Jasmine Matheny, 35, a small business owner from Michigan, when she signed up for her first retail credit card. nordstrom Just before Christmas when she turned 18, she was given a $5,000 credit limit, which she quickly maxed out and splurged on fancy presents for loved ones and new clothes for herself.
“I went crazy. I bought everything. I had no idea. Oh, I’m going to have to pay this back, honey, and I’m going to be charged a fee too. So in the end… I ended up being delinquent on that account,” Matheny recalled. Interview. “It created a storm of problems for me.”
Matheny’s debts at Nordstrom ended up in collections, and as a result, it took years to rebuild her credit.
“This shows how their greed is affecting them,” Matheny said of the record high interest rates. “They trick you and say you get 40% off when you get this card. So what happens when you end up with a balance? Well, you pay off that 40% and then some. I just paid.”
Inflated profits and hedged bets
Most credit cards are tied to the prime rate, which fluctuates based on the Federal Reserve rate. Generally, as the central bank’s federal funds rate declines, so does the amount of interest that a retailer’s bank affiliates can charge customers. Many card issuers preemptively raised interest rates without considering the decline in profits after the Federal Reserve’s planned rate cuts.
Retailers and partner banks typically split the revenue when shoppers pay interest and late fees on branded cards.
All retailers surveyed by CNBC raised interest rates before the Federal Reserve cut rates for the first time in four years on Sept. 18. Companies raised interest rates at a time when the market was becoming more confident that the prime rate would remain unchanged. The Fed will begin monetary easing at its September meeting.
On average, retail credit card APRs increased by 1.52 percentage points between September 2023 and September 2024, while the average interest rate for traditional credit cards increased by 0.08 percentage points — Bankrate data shows rapid rate increases are unique to store cards.
Additionally, the average annual interest rate for store cards increased by 2.21 percentage points from November 4, 2022 to September 2023. Subtracting the Fed’s 1.5 percentage point hike during this period, retailers have raised interest rates by an additional 0.71 percentage points. This is less than half of the increase in store card interest rates seen from September 2023 to September 2024, when the federal funds rate did not move.
Companies responding to CNBC’s requests for comment vaguely pointed to industry standards and the current economic environment when asked why they increased their store card APRs.
“We work closely with our banking partner, Comenity Bank, to ensure that APR adjustments are made responsibly and in line with industry-wide standards. Our goal is to help our customers buy what they need. , to pay over time and ensure they have access to essential items.” A Big Lots spokesperson told CNBC.
A representative referred Komenity to CNBC for further comment. The bank said: “The rate increases across the financial services industry early this year are due to several factors, including historic federal interest rate hikes, rising credit losses, and regulatory pressures.”
A Nordstrom spokesperson pointed to the benefits of the company’s credit card program and said, “We continually strive to simplify our credit card pricing structure.”
“Our pricing structure follows a variable rate model linked to the prime rate,” the spokesperson said. “This adjustment ensures that we remain aligned with the current economic environment and continue to offer competitive rates compared to other retail card programs.Despite the increase, our rate remains consistent with co-branded cards in similar situations.”
But the timing and scope of the store card interest rate hike points to a more obvious reason for the change: profit.
“Store cards are big business,” said Bankrate’s Rothman. “They can also become profit centers.”
He pointed to a 2023 report by Citi analyst Paul LeJuet that showed 49% of Macy’s 2022 operating profit came from its credit card program.
Rising interest rates appear to have boosted Macy’s performance again this year.
Finance chief Adrian Mitchell said on a call with analysts that the company raised its full-year outlook for credit card revenue in May “due to better-than-expected profit sharing from balance growth within the portfolio.” Ta. Mitchell said in August that consumers were holding credit card balances for longer periods of time, which boosted revenue “slightly more than we anticipated.”
Some retailers, including Macy’s, Nordstrom and TJX, have since passed on the Federal Reserve’s 0.5 percentage point cut in September to cardholders. Still, APRs are at record highs and are 2 to 2.25 percentage points higher than they were a year ago.
That may be bad news for consumers, but it’s welcome news for Wall Street. Store cards aren’t as popular as they once were, so retailers need to make more money from the customers they still have.
New private label card account openings have declined in seven of the past eight years, according to Equifax. Many shoppers, especially young people, are opting for services such as buy now and pay later.
Considering credit card delinquencies are at their highest levels since 2011, it’s no surprise that interest rates on cards that are usually easy to obtain are rising. However, as of the end of July, only 14% of private label cards were issued to consumers with subprime credit. Additionally, more than half of new accounts belonged to people with credit scores of 700 or higher, according to an October Equifax report.
Additionally, retailers did not selectively raise interest rates for customers with bad credit. Even businesses with good credit scores, like Macy’s customer Brian Robin, were being charged higher interest rates.
“This is completely out of line and completely unwarranted considering I have never missed a payment on their card and always pay above the minimum amount,” said the 59-year-old civilian. , says Robin, a concerned expert in Southern California, had this to say about Macy’s decision to increase its annual interest rate.
“My credit score is 744, so it’s not like I’m at risk of defaulting on my debt. It makes me less interested in shopping at Macy’s. So, just think about it. Why at Macy’s? “Do you want to make a purchase?” Where do you charge usury? ”
—Additional reporting by CNBC’s Stephanie Landsman.
