Department stores and big name retailers are increasingly making the hard sell to sign up customers for credit cards at the register. The store cards promise deep discounts on clothing, furniture and electronics, and are tough for shoppers to resist.
For some retailers, those credit cards are not just a sales tool, but also an essential way to bolster their struggling businesses — a trend that has worrisome implications for the industry and its customers.
The store cards, with steep interest rates that are often twice that of the average credit card, generate a rich profit stream for retailers at a time when many of America's traditional retailers are losing the battle for sales against Amazon and other e-commerce rivals. Those profits on plastic are helping obscure the true extent of the industry's pain, a major pressure point for a piece of the economy that employs one in 10 Americans.
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Weak consumer spending, digital competition and changing shopping habits have already roiled retailers. In recent months, the industry has shed tens of thousands of workers, making it one of the job market's weakest links. Macy's reported a sharp drop in earnings on Thursday, sending its stock spiraling and dragging down the rest of the industry.
But the businesses may be in worse shape than they appear, since store cards are a shaky foundation. If more consumers fall behind on their payments, the profits could dry up, intensifying retailers' troubles.
The reliance on profits from store cards is stark at some retailers.
At Macy's, the money from branded credit cards accounted for 39 percent of the company's total profit of $1.9 billion last year, up from 26 percent in 2013, according to an analysis by Morgan Stanley. Bloomingdale's, which is owned by Macy's, has pushed to increase the number of credit card customers that workers are expected to sign up each month, according to the store workers' union.
Amazon, by comparison, derives only about 3 percent of its total operating profit from its credit cards.
The cracks are starting to show. As signs of customer distress rise, one major lender, Synchrony Financial, which handles the credit cards for stores like Sam's Club, Gap and Toys "R" Us, is now setting aside more money for bad loans.
"Investors may not appreciate the magnitude of the retailers' stress because of the store card income stream," said Kimberly Greenberger, a retail analyst at Morgan Stanley.
Shoppers have been using store credit ever since the early 1900s, when department stores issued "charge plates" — small metal cards embossed with the customer's name and address that were often kept behind the counter. Today, it is virtually impossible to go into a store without getting an offer.
J. Crew offers card holders 15 percent off their first purchase, while Home Depot offers one year of "hassle-free" returns for card holders. A Macy's card offers savings of up to $100 for a two-day shopping spree.
At first the cards can seem appealing to customers with limited budgets, allowing them to finance purchases they might not otherwise be able to afford. But the retailers make much of their money on interest charges, so they are counting on many customers going into debt.
"These stores are propping up their failing businesses on the backs of lower-middle-class people," said Charles Juntikka, a bankruptcy lawyer in New York, whose clients often have rung up thousands of dollars in debt on retail cards.
Lillian Esposito, of Queens, accumulated at least 10 different credit cards, including ones from Toys "R" Us and Walmart. The mother of two young boys, she used them to buy school supplies and Christmas gifts, taking advantage of store discounts on the cards.
But any savings quickly evaporate when borrowers cannot pay off their bills right away.
As Ms. Esposito watched her balances grow every month, she calculated paying $25 on interest for every $100 she spent. And she fell behind on some payments.
She has since sworn off big retailers. "Never again," said Ms. Esposito.
Synchrony Financial, which issued some of Ms. Esposito's cards, declined to comment on her experience. But Samuel Wang, a spokesman for Synchrony, said the company underwrote "in a way that takes into account a customer's ability to pay" and encouraged customers in distress to contact the lender "so we can help address their situation." Toys "R" Us said in a statement the terms of its cards were similar to others.
In some cases, customers end up owing more in interest than the original bill. Many store cards carry rates around 30 percent.
"It's like fool's gold," said Bryan Hall, who lives in the Bronx.
Mr. Hall, 48, charged thousands of dollars on cards from P. C. Richard, Best Buy and Kay Jewelers, for an iPad, a 46-inch television and a ring for a friend who was getting married. He then sold off items he bought to pay his rent and keep his car on the road. He stopped making payments on several cards.
Kay Jewelers and Best Buy declined to comment on Mr. Hall. P. C. Richard did not respond to requests for comment.
The credit cards allow retailers to make money from their vast networks of physical stores, even as sales at those locations fall. To make up the gap, some companies are putting more pressure on their workers to sign up accounts.
The payoff for employees is low. Workers at some stores earn as little as $1 for each new account they open, and the discounts that their customers get for signing up for a card also cut into the employees' sales commissions.
At Bloomingdale's, the company's proposal to increase the credit card enrollment was a sticking point in recent contract negotiations, according to the Retail, Wholesale and Department Store Union.
A company spokeswoman, Cheryl Heinonen, said credit card enrollments are only one aspect of how employees are evaluated, but declined to discuss the confidential negotiations.
Ms. Heinonen added that the company was "comfortable" with its store cards, noting that card holders were among Macy's "most loyal and happiest customers." Citigroup, which issues the Macy's and Bloomingdale's cards, declined to comment.
Credit card profits could prove a fleeting lifeline for retailers. When customers fall behind or default, the banks are likely to clamp down on extending new cards, meaning that source of income for retailers can quickly evaporate.
Christian Buss, a retail analyst at Credit Suisse, said credit card profits were a "temporary subsidy" that the industry could not count on over the long term.
The problems are already starting to appear.
After enjoying several years of low defaults, Synchrony surprised investors in late April by announcing that it had to put aside a larger cushion for loan losses than many analysts expected. The stock sank 16 percent in one day.
Among the company's struggling borrowers was Jose Luis Garcia, a 75-year-old whose only income is from Social Security.
Last August, Mr. Garcia went into a furniture dealer on Pitkin Avenue in Brooklyn planning to buy a box spring for $100 in cash. But after the aggressive sales pitch, he came out with a full bed set, totaling $2,041, including delivery. The purchase was charged to a Synchrony card, which he says he never wanted.
Unable to keep up with interest payments of 29.99 percent, Mr. Garcia sought legal assistance from New Economy Project, a nonprofit group that helps low-income New Yorkers. After an inquiry from The New York Times, Synchrony said it looked into the matter and forgave his debt.
"They took me for an idiot," Mr. Garcia said.