Retail credit cards crush financially vulnerable people as delinquency rates rise

Over the past two months, shopping enthusiast Becky Beach has found herself trapped in the “Buy more, earn more points” game that retailers play.

Beach, a 37-year-old web designer, is behind on two of her in-store credit card payments – Loft and Kohl’s KSS,
+ 0.05%.

Beach, which has a FICO credit score of 784 (listed as “very good” by this measure), has started collecting points with every visit. “Loft gave me 30% off my first purchase,” Beach said. “I keep spending on free clothes and now I have $ 65 in points.”

Beach says she was “addicted” to getting free clothes and could no longer afford to pay off her full store card balances each month.

The high interest on these cards accrued and she initially owed over $ 3,000 on the Loft store card alone, but has since reduced that amount to $ 1,000.

Beach is billed an annual percentage of 26.24% on the Loft Card and 26.74% on the Kohl’s Card.

(Loft and Kohl’s did not respond to requests for comment.)

Beach is far from alone, but those with even lower credit scores seem to be falling behind with their credit card payments. The latest EXPGY EXPGY,
+1.33%
data shows that the retail delinquency rate over 90 days for consumers with a VantageScore of 600 or less is on the rise.

Like the more widely used FICO FICO,
-0.98%
Credit score, VantageScore uses a range between 300 and 850. A score below 601 is generally considered bad. The delinquency rate rose to 11.2% in the first quarter of 2019, against 11.1% in the previous quarter. In 2015, it was just over 8%.

In contrast, the 90-day retail delinquency rate for buyers with a good VantageScore (above 600) has not changed much since 2015. The rate remained below 0.04% and in the first quarter of 2019, the figure still stands at 0.03%. .

Don’t Miss: Half of Americans with this credit card regretted getting one

Most store cards have reward programs that can encourage overspending. But the potential downsides of above-average annual percentage rates can outweigh the rewards buyers get. The LoveLoft store card charges an interest rate of 27.24%, according to WalletHub. The average retail credit card purchase APR was 25.81% in the second quarter of 2019, according to WalletHub. The average APR on a traditional bank-issued credit card is 16.91%, according to Federal Reserve data for the same quarter.

While the likelihood of buyers with bad credit becoming delinquent is high, the recent increase in defaults could also be due to an increase in lending to subprime borrowers, said Rod Griffin, director of education and finance. consumer awareness at Experian. “As businesses seek more customers, we are seeing a slight increase,” Griffin said.

Retail stores routinely hand out cards with benefits to walk-in customers without performing credit checks, says Ted Rossman, analyst at CreditCards.com. Consumers with poor credit have more options than ever before. Amazon AMZN,
+ 0.01%,
for example, now offers a “Credit Builder” card explicitly designed for people with bad credit or new to credit.

Amazon’s partner on this financial product is the leading private label card issuer, Synchrony Bank. Its most recent earnings report showed more evidence of an increase in retail card defaults. The company’s second quarter write-off rate – the percentage of loans that a company foregoes collecting – rose to 6.01% from 5.97% last year; excluding PayPal PYPL,
+ 1.14%
credit program and the Walmart WMT,
-0.24%
wallet.

While consumers tempted by big discounts don’t often think about becoming delinquent on their cards, CompareCards.com analyst Matt Schulz said it was no surprise that delinquencies for those with low credit scores are increasing.

“With debt continuing to rise, it makes perfect sense that defaults are also on the rise,” he said. “They are still generally low by historical standards, but I expect them to continue to rise.”

How to Avoid Being a Victim of “Winning While Shopping”

• It can be dangerous for consumers to apply for anything that comes their way. “If you get an offer, it doesn’t always mean you have to take it,” Griffin said. Read the conditions carefully. Ultimately, consumers have to make a decision based on their financial needs.

• Only purchase a store credit card if you are sure you can pay off the balance in full. Retail card rates are about five percentage points higher than general-purpose credit cards and 15 percentage points higher than low-interest credit cards, Rossman said.

Retail cards are great credit cards if used wisely

Beach has private label cards from other retailers like Banana Republic GAP,
+1.06%
and JC Penny United States: JCP,
all with high interest rates. While rates can pinch consumers who do not pay off their balances in full, retail cards, when used well, can be a good starter tool for improving credit health.

“As long as they pay at least the minimum balance, it will help create credit,” Griffin said. “And over time, they will have access to other cards as well.”

Another option for construction credit is a secured credit card. They act like any other card, but require a cash deposit that acts as a guarantee against the credit limit. Amazon’s new Prime Builder credit card is an example of a secure card. It has an APR of 28.24% and allows a consumer to switch to their store card after the account has been in good standing for a year.

For those with a low credit rating, the credit limit on secured cards may be low, but they are a less risky alternative.

About Sally Dominguez

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