The high rates come as many of the major retailers that have relied on these cards for profit are struggling and credit card alternatives such as buy now pay later (BNPL) services are gaining momentum.

High APR rates are a double-edged sword for retailers. If the cards are popular with shoppers, they can generate a lot of additional revenue for businesses. On the other hand, high interest rates can deter customers who are keeping a close eye on their spending in the run-up to a potential recession. As Andrew Lipsman, principal eMarketer analyst at Insider Intelligence, told Modern Retail, “There will always be this trade-off.”

What complicates matters further is that many shoppers, especially younger ones, are turning to BNPL services like Klarna and Afterpay. These allow customers to pay in installments and typically charge no interest if a person can pay off their entire balance in a certain amount of time. The BNPL industry is projected to grow at a CAGR of 33.3% by 2026 to $596.7 billion, according to GlobalData.

Historically, retailers have relied on brand name credit cards to build their businesses. Macy’s, for example, made $206 million in net revenue, or 3.7% of total sales, from its credit cards during the third quarter of 2022, according to its latest earnings report. In 2016, 39% of Macy’s annual profits came from its branded credit cards, according to the New York Times. However, retailers that once relied on store credit cards are having to make adjustments as consumers reassess their priorities and a new generation of shoppers head to the register. As these businesses, particularly department stores, work to stay relevant, they may need to look elsewhere to improve their bottom line.

Many retailers are likely hoping that these higher rates can help them out of the slowdown in growth. Macy’s, which has offered a credit card for years, lost 3.9% in net sales in the third quarter compared with a year ago. Bed Bath & Beyond, which now has two versions of a credit card, is closing stores and laying off employees as it warns there are “substantial doubts” about its future. Nordstrom, which offers a credit card with TD Bank USA, reported a second-quarter net loss of $126 million and a third-quarter net loss of $20 million. Made $320 million in net credit card revenue in the nine months ended October 29, 2022, compared to $283 million in the nine months ended October 30, 2021.

The rise of retail credit cards

Credit cards came on the scene after World War II, when consumer spending took off. The first credit cards emerged in the 1950s, and retail cards weren’t far behind. In the 1970s, retail cards were more popular than bank-issued ones, according to US News and World Report.

For many retailers, “credit cards were that additional revenue stream long before retail media and digital advertising entered the equation,” Lipsman said.

Today, customers can sign up for a credit card at any number of retailers, including Sephora, Nordstrom, J.Crew, Big Lots, Bed Bath & Beyond, Target, Walmart, Amazon, Home Depot, Best Buy, and Costco, to name a few. others. The average American had three credit cards and 2.3 retail store cards in 2021, according to an Experian survey.

These cards often come with a number of perks, including cash back and free shipping, all of which can entice a customer at the point of payment. Sephora, for example, offers cardholders 25% off their first purchase made within 30 days, 4% cash back on Sephora items, and a faster way to earn Beauty Insider points. He Target REDcard credit card offers cardholders an extra 30 days for returns, 5% off all purchases at Target and, and free shipping on most items.

The best types of retail credit cards offer decent discounts and rewards, Melissa Lambarena, senior writer for NerdWallet’s credit card team, told Modern Retail. Easy redemption is also key, she said, because “you don’t want rewards that require you to go through a lot of hoops.”

Compared to other credit cards, retail credit cards are easier to obtain, which can help those who are still building their credit, Lambarena said. Store credit cards could also offer special financing, although Lambarena cautioned that “there are potential risks to that financing. It can be a benefit if you use it correctly, but it can be a drawback if you use it incorrectly.”

On the downside, retail credit cards often have higher interest rates and lower credit limits than other cards, Lambarena added. Additionally, “some store credit cards can only be used with that specific retailer or partner brands. And sometimes, reward redemptions come with limitations or restrictions.”

Some cards, such as the Verizon Visa Card and the The Amazon Prime Rewards Visa Signature Card will give you cash back on purchases made at other retailers. There are also many non-store affiliated rewards cards that give cardholders cash or points to use toward merchandise or gift certificates at the stores of their choice.

‘Avoid choosing… on impulse’

Today, retailers are feeling the pressure of rising costs associated with marketing, supply chains, and labor. With this in mind, it’s “not surprising” that many gravitate toward high-interest credit cards, said Insider Intelligence’s Lipsman.

However, “in the same way that there is leverage if you can grow this revenue stream, you can also reduce earnings leverage if the revenue stream starts to slow,” he explained. “If the trends are not in your favor, there is a real risk if that revenue stream encounters headwinds and perhaps experiences dips that can really depress a company’s bottom line.”

While credit cards still lag behind the majority of purchases (59% of people used a credit card to make a digital purchase in December, according to Insider Intelligence), interest in credit cards is waning, particularly among the younger generations. BNPL’s services, in particular, are also eating up a bigger share of the market. For example, 55.1% of Gen Z customers and 48.6% of millennials used BNPL in 2022, Insider Intelligence data shows, and this number is projected to reach 59% and 53 .6%, respectively, by 2026.

More BNPL brands are also partnering with retailers to appear in physical stores. Affirm, for example, has conducted in-store marketing campaigns with partners such as Audi, Warby Parker, Walmart, The RealReal, and Dick’s Sporting Goods. Sephora, which has its own credit card, has even mocked Afterpay at checkout.

The prospect of credit card debt is also a drawback. Card balances for US customers hit their highest level “in more than 20 years” in November, according to the Federal Reserve Bank of New York. The total, at $38 billion, was an increase of 15% over the prior year.

Many retailers will offer shoppers credit card applications at the register. But NerdWallet’s Lambarena says customers should always be careful when signing up for a credit card or payment plan.

“Avoid choosing a store credit card or buy-now-pay-later plan on impulse at checkout,” he said. “Please take the time to read the terms and conditions and understand how those options work before choosing them.”