Retail cards can build loyalty, consumer debt

NEW YORK -- Department stores, catalog companies and other retailers want customers to sign up for the merchants' own credit cards because they believe these cards make shoppers more loyal.

So many retailers are offering incentives -- like 15 percent off purchases made with a new account -- to persuade more consumers to use the cards.

Credit experts, however, remind the nation's already deeply indebted consumers that discounts or rebates tied to retail cards can quickly be offset by the high interest rates most retailers charge.

"The consumers who realize benefits are those who don't carry a balance on their cards," said Greg McBride, a financial analyst at Bankrate.com in North Palm Beach, Fla. "The merchant may be giving a 10 percent discount, but he's often charging interest of 20 percent or more, and those who carry balances need to watch out for that."

Consumers also should keep in mind that accumulating too may credit cards also can hurt their credit rating, which lenders look at to determine if they'll issue a mortgage and insurance companies scan before setting a price on an auto policy.

Craig Watts, consumer affairs manager at Fair, Isaac & Co., which developed the widely used FICO credit risk scoring system, said "one of the things FICO takes into consideration is how many revolving lines of credit you have."

Having "a snowbank of cards" can reduce your score, Watts said. More important, he added, his how you manage your credit.

"Always pay on time," Watts advised. "And generally speaking, try to keep account balances low ... say, lower than 50 percent of the credit limit."

Tom Holliday, president of the Retail Advertising and Marketing Association, a division of the National Retail Federation, said some of the push by retailers for what are called affinity and proprietary credit cards is an attempt to win back market share.

"Department stores used to have 65 percent of the business," he said. "Then MasterCard and Visa, affiliated with banks, came on the scene and changed that mix. Loyalty wasn't a factor; the cards could be used anywhere."

In addition to building loyalty and brand recognition, he said, retailers can use the information they glean from card sales to send out targeted advertising or to manage their inventory better.

"It also has to do with the evolution of the Internet," which has become a major sales channel for many merchants, Holliday added.

Robert Manning, a professor at Rochester Institute of Technology and author of the book "Credit Card Nation," worries that consumers see retail store cards as a way to extend their already stretched borrowing.

"If you have a $10,000 limit on your Visa card and you already owe $8,000, you might want to 'save' the rest for and emergency, like a car repair," he said. "So here comes a deal from The Gap. They'll give you 15 percent off when you use the card for the first time, and another discount when you use it online. Who thinks about interest rates?"

The current rate on the Gap card is 17.05 percent, compared with the national average of 13.05 percent on bank cards.

"A big part of the problem is that consumers assume that if banks and stores give them more credit, these institutions must think they can afford to pay," Manning said. "That isn't necessarily the case."

It does help explain, however, why the typical American household now has more than 10 debit and credit cards, Manning said.

On the Net

www.bankrate.com

www.myfico.com

www.nrf.com

www.creditcardnation.com