The average interest rate for retail credit cards has reached a record high of 30.45%—well above the average rate for general-purpose credit cards, which is about 21%.
The priciest cards now top out at a 36.99% interest rate, according to a survey from Bankrate. Among the cards in this range are those from Big Lots, Burlington, Good Sam, Michaels, and Petco. However, some retailers are still offering more reasonable rates, such as Costco at 20.49%, Bass Pro Shops at 21.12%, and IKEA at 21.99%.
Retail credit cards have traditionally been products with softer underwriting standards. It’s common to make a purchase at a department store and be encouraged to apply for a credit card, as if shopping at the retailer alone were enough to qualify.
A True Profit Center
To offset the risk of anticipated cardholder defaults, retailers charge higher interest rates. While issuers have to deal with higher delinquency rates, credit card programs also represent a major profit opportunity for retailers. For example, Macy’s has reported that nearly half of its operating profits are derived from its credit card business.
“Cardholders won’t pay an annual fee for a store card and the retailers that offer the cards want the highest possible approval rates,” said Don Apgar, Director of the Merchant Payments Practice at Javelin Strategy & Research. “Maximizing approval rates means taking customers that a bank might decline for a Visa or Mastercard. As you reach down the FICO score band to than next tier of customers, higher charge-offs come along with that territory.
“This is also why you always see a store card offered with a promotion—open a Home Depot card and take 10% off your first purchase, or they’ll offer no interest for the first 12 months,” he said. “The added benefits are there to attract creditworthy customers to apply. If the only people who apply are the ones that need credit, either because their other cards are maxed out or because nobody else will approve them, the card portfolio ‘deselects’ and losses soar.”
Tracking the Spread
The rates on retail credit cards tend to follow the trends of general purpose credit card rates. While the spread is now about ten percentage points, that difference can vary based on factors such as the minimum FICO score required for approval, the average purchase size, and the percentage of cardholders who carry a revolving balance.
Apgar estimates that around half of all store cardholders carry a balance from month to month, compared to 40% of general-purpose cardholders.
Other interest rates are also inching higher as well. This week, the average rate on a 30-year mortgage in the U.S. rose to 6.84%, its highest level since July.
