How store credit cards foreshadow the retail apocalypse

Target Red CardPhoto courtesy of Mike Mozart

In my last post, I mentioned how I had once had an Exxon credit card given to me by my mom to use for emergencies.

It made me think about those specialty credit cards. How quaint I thought. A credit card that people would use at a given store.

And then I had a bit of sinking thought that right now, people are still using those credit cards! <shudder>

Regardless of what you think about using credit cards (I say the best place for credit cards to be long-term is in a drawer), it’s hard to disagree that store, or retail, credit cards are anything other than a terrible idea.

And not just for us. For the companies who issue them as well. Even though it seems like they are their salvation.

Why a store credit card?

Retail stores offer credit cards because they make money on them. They offer them to you and claim that you will save money by using them. It’s as simple as that.

Regarding the deals, I regularly see “Save 20% today when you open a credit card!” signs on checkout counters. This appears to be particularly pernicious in department stores, but there are few retailers that aren’t in the game.

Getting 20% off sounds like a good deal, though of course nothing comes totally free.

Retail credit cards have a much higher APR (rate) than regular credit cards. Like much higher. In one 2016 survey that looked at both, where they found the average APR for a regular credit card at 15%, an average retail credit card APR is 25%.

25%! Wow. That might not be as bad as the hundreds of percent that you find with a payday loan, but it’s still painful. (Here’s a list of some retailers and their APRs.)

Think about it. Taking a $10,000 balance where you pay $300 a month, at 15% it would take you 3.5 years to pay it off, and you would pay more than $13,000 when you were done.

Now up that rate to 25%. With the same payments, now you’re looking at almost 5 years to pay it off, and you’d pay more than $17,000 when you were done.

Ouch. Now you know where these stores make their money from. They’re making it from you.

Zombie stores

But here’s the problem. This is quickly becoming the only area of business where retail companies are making more profits as time goes on.

You’ve no doubt noticed how stores all around us are cratering, our malls closing, and the retail landscape starting to resemble a George Romero movie.

Here’s a list of all the stores that are closing as of this year. And we’re not done the year yet!

The scary part is that earnings from credit cards are a growing share of retailers’ profits. Kohl’s, Macy’s, Target, all of them reported percentage increases since 2013.

If a retailer is making most of its money on the inability for customers to pay for its products, then this is not a long-term viable solution.

It’s a very meta-problem too. When you go into a store and find that the most aggressively touted product is the store’s credit card, then you have to ask yourself: what is the purpose of this store? Is it just to sell credit cards?

My guess on where things will go

Two directions are likely here. In one direction, the percentage of profit grows and grows at these places, until they become purely credit card vendors, in which case, they will have no reason to sell much of anything else. If that happens, the sales (and the credit card usage) will drop. And so will profits.

In the other direction, people will get wise to the ill-advised use of store credit cards, and stop using them. In which case, profits will drop.

Either way, profits will eventually drop. I don’t really foresee a third option, at least until we shut down all the unnecessary retail we’ve (over-)built over the past few decades.

This needs to happen, regardless. Who knows what our places might look like then, though.

Yes, you could save 20% on your purchase today by signing up for that store credit card. And yes, you might pay it all off without paying interest. Some people do.

But is it worth it? Why not wait for the Going Out Of Business Sale? You know it’s likely coming soon anyway.

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

I offer a free phone consultation to anyone who is interested in changing their financial narrative. Are you ready? Click here for details.
Mike Pumphrey
Posted on September 14, 2017
  • mpinard

    Here’s a related question: when we see all of our favorite independent cafes, bookstores, clothing boutiques, and craft shops going under, to be replaced by corporate chains that can afford to use debt to float unprofitable stores (and outrageous real estate/ rental prices) going, how do we compete? How do we resist? There are some people who heed the call to buy local, but the vast herd does not, and I fear where they will drive us…off a cliff. 🙁 The tiny resources for small business can do little against the hoard of demands: insurance, liability, rent, taxes, etc. Thinking a lot about minimum wage/ living wage/ inequality in the US right now and your posts are spot on with my frustration! Thanks, Mike!