Credit Cards 2010: Higher APRs, Reduced Rewards
If you carried a balance on a retail credit card in 2010, chances are you spent more money on your purchase than you would have last year, as retail card issuers have been increasing annual percentage rates (APRs) while making rewards programs a little less friendly.
CreditCards.com surveyed 36 retailers' credit cards in the summer of 2010, and of those cards, half of them had higher APRs than in 2009. Of the issuers that offer both co-branded and non-co-branded cards, the non-co-branded cards typically had the higher rates. Co-branded cards are cards that are sponsored by both the retailer and an issuing bank as opposed to just the retailer (non-co-branded) issuing the card. (See CreditCards.com 2010 retail credit card chart.)
Nineteen cards had APRs of 23 percent or higher, compared with only 11 in 2009.
Since so many retail credit cards have APRs nearing the 25 percent range, it's more imperative than ever that consumers be able to pay for items as quickly as possible. "When you go to make a purchase on credit, know what the true cost is going to be if you don't pay it off right away," says Melinda Opperman, senior vice president of community outreach and industry relations for Riverside, Calif.-based Springboard Nonprofit Consumer Credit Management.
One incentive that gets many consumers to apply for a retail credit card in the first place is the rewards program offered by the issuer. "There are opportunities where you can get a discount for using that particular card," says Opperman. However, the 10 percent or 15 percent savings can easily be negated by interest if consumers carry a balance, particularly on cards that have an APR in the 20 percent range.
Some retail card issuers have cut back on their rewards programs, or made the requirements more stringent for consumers to redeem rewards. For example, Sears and Kmart, which award points for purchases, last year let consumers earn travel discounts once they received 10,000 points and a round trip flight at 25,000 points. In 2010, consumers needed 13,000 points to begin getting travel discounts and 49,200 points to earn a round trip. The Credit CARD Act also impacted the rewards offerings of some retail cards since rules restricting how retailers can advertise deferred interest plans have led many retailers to rein in no-interest, no-payment deals.
A perfect storm
"There's been a fairly industrywide upward movement in APRs," says John Grund, a partner with First Annapolis, a Linthicum, Md.-based consulting firm that advises banks and retailers on their credit card offerings. "That, I think, is the result of a triple whammy -- the global credit crisis, the recession and the Credit CARD Act of 2009."
The credit crisis and recession led to an increased number of charge-offs, as laid-off and cash-strapped consumers fell behind on payments. They also scared many consumers into keeping cash in their pockets and avoiding using retail cards, commonly referred to as private label cards. "Clearly consumers shied away from buying big-ticket, durable goods, which are very conducive to the private label product," says Grund.
Retail credit card issuers also grappled with a blow to their image. "You can't ignore the fact that there has been a ton of negativity surrounding credit cards in general," says Grund. Take Angela Winston, a 38-year-old schoolteacher in Gaithersburg, Md. "I used to use store credit cards, but now I think for the most part, they're a rip-off," Winston says, citing the high interest rates. Though she has one retail credit card that she pays off each month, Winston has no intention of applying for others "because I don't want to get into any more debt," she says.
The CARD Act caused its share of problems for card issuers, mainly by placing limitations on fees and APRs. The result of all of these changes led to a decrease in profitability for issuers. Those issuers responded by raising their rates and tightening their credit requirements, Grund explains.
A turning tide
But while issuers have faced a challenging environment during the last couple of years, signs show that things may be improving.
No one can deny that 2010 brought more costly credit. But with the economic climate for card issuers improving, have consumers seen the last of the interest rate hikes?
According to Fitch Ratings' Retail Credit Card index, in July, late payments fell for the fifth consecutive month. Not only that, but there were fewer defaults for the second straight month and both late stage delinquencies and charge-offs decreased.
"The economy doesn't have many bright spots, but there is a general belief that the recession has bottomed out or is in the process of bottoming out," says Grund.
Americans are also turning to their credit cards again. According to global market research firm Synovate's Mail Monitor, which tracks credit card solicitation and response rates, American households with credit cards have spent on average $1,559 across all the cards in 2010, which is up 6 percent over all of 2009.
Another bit of good news for retail card issuers is the fact that the CARD Act has been fully implemented. "Now that the third leg of the Card Act is enforced, there has been an element of uncertainty that has now been removed from the equation," Grund adds. As a result, card issuers aren't as likely to raise rates or change terms in anticipation of unknown consequences.
"No one knows officially where the tipping point is for APRs but for the most part we are expecting more stability going forward than we've certainly seen in the past 24 months," Grund says.
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