Published: February 9, 2009
Though only a small corner of the credit card market, cards that can be used only at a single retailer are quickly turning into a big headache for their issuers.
The cards, known in the industry as private label credit cards, tend to be held by riskier borrowers with fewer credit options. Losses on the cards are rising at a faster pace than the broader credit card market — reaching a three-year high of 10.51 percent in January, according to Fitch Ratings, up 44 percent from a year ago. That compares with general credit card losses of 7.5 percent, up 40 percent from the year before.
While private label cards account for only about 11 percent of all credit card loans outstanding, their troubles offer a window into the deteriorating finances of some of the most distressed Americans. And the losses may prove to be a warning of deeper problems ahead for general cards as the economy weakens and unemployment climbs.
“The higher rate of charge-offs on private label reflects the impact that the economic downturn is having on all customer classes, with a particular strain on lower and middle-class income households,” said John Grund, a partner at First Annapolis, an advisory firm focused on the payments industry. “The next 12 months, 2009 into 2010, just doesn’t look real pretty as the jobless figures escalate.”
Perhaps the best indication of the strains on the market is that the largest issuer of private label cards, General Electric, has indicated that it would like to quit the business altogether.
G.E., which has a $32 billion portfolio of cards for companies like Wal-Mart and Lowe’s, put its unit up for sale in December 2007 but abandoned the effort in September after it failed to find a buyer.
The second-biggest issuer, Citigroup, which lends on behalf of retailers like Macy’s and Sears, listed its unit as one of its noncore businesses in an announcement last month that it would split the company in two.
The troubles in the private label card business may also further affect sales at retailers, which have already been reeling as consumers have cut back. Mr. Grund estimated that 30 to 40 percent of department store sales went on private label cards.
“Credit-tightening will shrink the amount of private label credit outstanding over time, but it will have an immediate impact on retail sales,” he added. “Consumers need financing to buy merchandise, especially big-ticket items, and issuers can cut too far to reduce loss exposure, making the recession even more problematic.”
Of course, some retailers, especially those that cater to more affluent consumers, are experiencing fewer losses, Nordstrom among them. And while some retailers continue to offer the cards at their registers in exchange for a same-day discount, the lenders have made it more difficult to qualify, much as they have done with traditional credit cards.
Fitch, which tracks $72 billion in receivables issued by banks on behalf of retailers, expects private label card losses to surpass 12 percent by midyear and losses on general cardholders with solid credit to reach 8 percent.
“Credit quality will continue to deteriorate for general-purpose cards, and at a rapid, more urgent pace for retail cards,” said Michael Dean, managing director at Fitch.
Though there are exceptions, private label cardholders tend to have less robust credit histories, and thus fewer pieces of plastic to choose from than the general population. They tend to use private label cards to finance bigger-ticket items like appliances and jewelry, experts said.
In contrast, traditional credit cards are typically held by consumers with stronger credit histories who seek rewards, like airline miles, or simply prefer the convenience of cards.
Delinquent payments on private label cards tend to be about 2 to 3 percentage points higher than on more widely used cards, card experts said.
“If you have a compromised economy, who do you pay last?” Robert Hammer, president of R. K. Hammer, a credit card advisory firm, said. “You pay the private label card and maybe your dentist” after all the other bills.
To balance their increased risks, private label issuers charge higher interest rates — from 21 to 24 percent on average, compared with an average of 14 to 17 percent on traditional credit cards, experts said.
Private card issuers build in other protections, too. “Limits tend to be lower,” said Steven Jacowitz, a director at Auriemma Consulting Group, and “you can’t get a cash advance, you can’t do a balance transfer and you can’t use it outside of the store.”
For Citigroup, private label and co-branded cards represent about 37 percent of its $149 billion card business. Losses on those cards totaled 9.86 percent at the end of the fourth quarter. And 3.26 percent of its loans were more than 90 days past due.
Two of the larger retailers that still operate their own card businesses, the Target Corporation and Nordstrom, have changed their policies, in part to deal with the deepening recession.
Target, which sold a 47 percent stake in its loans to JPMorgan Chase in May, has about $9.27 billion in loans outstanding. About 6 percent, or roughly $500 million, of the loans are on store-only cards; the rest of the loans are on Target Visa cards.
For December, Target said it had annualized losses of 12.28 percent. About 8.44 percent of loans were more than 30 days past due. From the end of 2007 through September, Target had cut total credit lines by 14.6 percent.
Target’s biggest losses first came in areas with the largest drop in home values, according to its third-quarter earnings conference call transcript. Now, those problems are in wider swaths.
Because most of Nordstrom’s customers have top-notch credit, losses in its $1.9 billion portfolio, which includes Nordstrom private label and Nordstrom Visa cards, have not been as severe as those of other private labels. Its losses were about 5.7 percent of its portfolio for the quarter ended Nov. 1, and 3.2 percent of loans were more than 30 days past due.
Whether their credit lines are shrinking or not, many consumers are choosing to keep a tighter grip on their wallets.
“When everyone is fearful about whether they will have a job in the next year or so,” said Marc G. Sczesnak, president of TD Retail Card Services, which issues cards for small and midsize retailers, “they are managing their personal balance sheets and reining in spending that is not absolutely necessary.”
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