Research and Statistics

Retailers tighten credit card standards


While it may sound enticing to save 15 percent off your purchase at the checkout counter by applying for that retail credit card, your chances of getting approved for a store credit card are getting slimmer.

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While it may sound enticing to save 15 percent off your purchase at the checkout counter by applying for that retail credit card, your chances of getting approved for a store credit card are getting slimmer.

It’s no longer easy to get a store credit card — that retailer-branded plastic that frequently offers a 10 percent to 20 percent discount on a shopper’s first purchase with the card. Most retailer cards are issued by banks, which have responded to the ongoing economic crisis by tightening their card approval standards, as shown by recent Federal Reserve data. “All issuers are taking a look at re-evaluating their underwriting criteria,” says Marc Sczesnak, president of TD Retail Card Services, which issues credit cards on behalf of a number of mid-sized and smaller retailers in the United States and Canada.

That’s because banks are hoping to protect their profits. “Whenever there is an economic downturn, it puts downward pressure on the lending practices of banks, and they will take steps to manage their risk exposure,” says Peter Garuccio, director of public relations for banking industry group the American Bankers Association. “It’s just sort of natural and to be expected.”

Private label vs. in-house
Banks dominate the retail store credit card market, lending $19 of every $20 charged. Also known as private-label credit cards, this type of plastic is different from in-house credit cards owned and operated directly by the retailer. In-house cards are a dying breed. “There isn’t a whole lot of that left anymore,” Garuccio says. Retailers have mostly sold off their card operations to banks to operate.

For consumers, the dominance of banks as controllers of retail credit cards means they carry the same approval standards as bank-issued cards overall. And banks’ lending standards have tightened sharply.

Still, in-house credit cards may experience a mini-renaissance. According to a report by Business Week, discount retailer Wal-Mart is in talks regarding a new credit card “that would offer lower interest rates and few of the onerous fees associated with traditional credit cards.” Wal-Mart, America’s largest retailer, currently offers credit cards in partnership with consumer lending giant General Electric.

Business Week reports that a self-financed Wal-Mart credit card would mean better terms for customers. Still, that development may need to wait. Although Wal-Mart confirmed that some discussions have taken place, the retailer told Business Week it has no immediate plans to introduce such a card.

Banks get stingy with shoppers
Meanwhile, banks themselves acknowledge the tightening of approval standards. “Over the last several months, HSBC’s card and retail services business has tightened its credit criteria,” says Cindy Savio, spokeswoman for HSBC, the third-largest issuer of private label credit cards. HSBC issues cards for retailers such as Best Buy, Bon-Ton, Costco and Saks Fifth Avenue. Savio says that when HSBC adjusts its pricing and credit criteria, it considers the state of the economy, in addition to market and other factors.

Citi is also limiting which shoppers get private-label cards. The bank has become stricter about extending credit, especially in areas of the country hit hard by the housing crisis, according to Citi spokesman Samuel Wang. “For existing customers, we are implementing a new series of limits and tighter criteria, such as rising minimum score requirements for cash advances,” he says.

As a result, retailers are seeing fewer customers get approved for store credit cards. Stores’ “credit approvals have dropped slightly,” says Britt Beemer, chairman of consumer behavior survey firm America’s Research Group, noting the decline probably amounts to a four to six percentage point drop. “It isn’t a big number, but it’s moving downward,” Beemer says.

Meanwhile, the amount of available credit provided by store cards is also heading south. Shoppers are finding that “the amount of money they’re getting approved for is less as well,” Beemer says.

In-house credit decisions
Those stores that still manage their own credit cards are taking things more slowly, watching the economy and waiting. Target, which offers shoppers an in-house card, sees a need for strict approval standards. “Clearly, this is a challenging time for all lenders, and we’re not exempt from it,” Terry Scully, president of Target Financial Services, said in a company Webcast on Oct. 23. He noted that Target is “continuing tight credit line management that focuses on high-risk behaviors and high-risk geographies.”

Target spokeswoman Courtney Foster confirms that the company is keeping its eye on who gets approved for a Target credit card. “I can assure that we are focused on account acquisition decisions,” she says.

The Army & Air Force Exchange Service, a large issuer of in-house credit cards, says it has yet to act. “Currently, the Military STAR card program has not made any changes to card approval standards. However, the current financial environment is being monitored, and changes will be made if warranted,” says AAFES public relations manager Judd Anstey. He says AAFES has not limited lines of credit for either its new or existing cardholders.

All issuers are taking a look at re-evaluating their underwriting criteria.

— Marc Sczesnak, president
TD Retail Card Services

Stores still offer credit cards
Despite a general tightening of approval standards for private label cards, the marketing of those cards continues — even though banks wish they could be more targeted with offers. “Due to the Truth In Lending Act, we can’t discriminate at the point of sale who we offer credit to,” says Marc Sczesnak, president of private label issuer TD Retail Card Services.

Banks may not have much control when it comes to promoting their store cards. For some private label cards, marketing decisions — such as whether to offer a shopper a card at the counter and how to promote cards in the store, in the mail and online — are mostly left to the store. “How the card is offered to the customer is determined by the retailer,” says HSBC’s Savio. HSBC does have a role to play, however: “We work with them to integrate that card program into their marketing,” she says.

Target leaves point-of-sale decisions out of human hands altogether, making use of an “intelligent system” that prompts cashiers to offer the appropriate Target financial product (if any) to guests at checkout. “This system prompts an offer based on guest behavior. It’s how Target delivers a relevant offer to the guest at the right time — ultimately resulting in a great experience for our guests,” Foster says.

As a whole, economic changes could mean shoppers are subject to fewer of these marketing pitches. Beemer says that retailers are “not as aggressive as they used to be” when it comes to promoting their store credit cards. With many customers simply using the card once for the initial discount and then cutting it up, “The store doesn’t see the long-term benefit that they did 10 years ago,” he says.

Speedy screening process
Bank and retailer involvement in the screening of applicants takes place on the back end. In HSBC’s case, the shoppers fill out an application and a store employee then enters the information into the retailer’s point-of-sale system. The data is processed by the bank’s proprietary risk model. “HSBC makes that determination as to whether that customer is approved for the store credit card” — a process that takes mere seconds, Savio says.

Like any credit card product, customers need to manage these responsibly if they hope to reap the benefits.

— Marc Sczesnak, president
TD Retail Card Services

That should remain a constant. Regardless of the economy, “the approval process itself will not change,” says HSBC’s Savio. “It is highly automated and accesses information live from the credit bureaus.”

Despite the quick turnaround, shoppers may nevertheless find themselves disappointed. “It might not be instant approval. It might be instant decline,” Sczesnak says. That’s because consumers’ credit scores have suffered in this difficult economy. “The current scores in general have declined as people have strapped on more debt and had trouble paying existing debt,” Sczesnak says. “That makes it a little more difficult for people to then go get new sources of credit.”

Existing cardholders
Other changes impact existing store credit cardholders. TD Retail Card Services says it has been more targeted in the way store cards are promoted, restricting some of its special offers and promotions to only those cardholders with solid credit. “People who have marginal credit scores, we won’t send those direct mail pieces saying ‘Save 10 percent,'” says Sczesnak, noting the issuer would rather have such cardholders instead pay down their existing balances. “We don’t want to be doing a bad thing for people where we’re pushing them over the edge,” he says.

Not that different
Regardless of the type of store card and fluctuations in the economy, some things remain constant. “Creditworthy customers can always get the credit they need,” ABA’s Garuccio says.  

Just like many other forms of plastic, banks say store credit cards continue to have a place. “The store cards provide a great opportunity for consumers to take advantage of special deals with their favorite retailers,” says TD’s Sczesnak. Still, he urges caution. “Like any credit card product, customers need to manage these responsibly if they hope to reap the benefits,” he says.

See related: Chart: Compare largest retail store credit cards, Banks’ lending standards tighten sharply

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