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Record High Interest Rates on Retail Credit Cards Raise Concerns for Consumers

In a recent trend, numerous major U.S. retailers and their banking partners have raised the interest rates on their store-branded credit cards to unprecedented levels, coinciding with a period of declining sales. This increase has been noted as a strategy to bolster profits just before the Federal Reserve began its rate-cutting measures.

According to a detailed analysis by Bankrate.com, at least 50 retailers—including well-known names like Big Lots, Gap, Petco, Burlington, Macy’s, and TJX Companies—implemented significant increases to their Annual Percentage Rates (APRs) between September 2023 and September 2024. The report examined the credit cards of the nation’s top 100 retailers.

Among these, Big Lots implemented the steepest hike, raising its APR from 29.99% to 35.99%. Gap followed with a 5 percentage point increase across its various brands, while Petco also raised its rates by 4.5 percentage points.

The majority of the retailers analyzed now charge an astonishing APR of 35.99%, which is shared by Big Lots, Academy Sports, Burlington, Michael’s, and Petco. This marks a notable shift, as Ted Rossman, a senior industry analyst at Bankrate, pointed out that historically, few credit cards dared to exceed a 30% APR threshold. However, with the Federal Reserve increasing rates significantly in recent years, credit card issuers have adjusted their strategies, leading to this drastic rise.

The push to raise rates was not solely influenced by federal policies. In anticipation of the Fed’s rate cuts, many retailers opted to increase their interest rates ahead of time to safeguard their profit margins. This decision comes as average interest rates on store cards reach new heights, particularly during the holiday shopping season—a peak time for acquiring such cards.

As consumer credit card debt hits record levels and delinquency rates rise to their highest since 2011, financial experts advise caution. “If you’re offered a store card this holiday season, take a moment to consider the terms. I recommend refraining from it if you’re likely to carry a balance,” Rossman cautioned. He emphasizes that while rewards can be beneficial if the balance is paid off immediately, many consumers are unaware of the implications involved in these credit agreements.

Jasmine Matheney, a small business owner in Michigan, shared her experience of signing up for a retail credit card at Nordstrom shortly after turning 18. She quickly maxed out her $5,000 limit, leading to overwhelming financial consequences. “I had no idea that I’d have to pay it back, along with the soaring fees,” she reflected. The fallout from her Nordstrom card ultimately caused years of struggle to rebuild her credit.

Profit Enhancement and Financial Strategies

Retail credit cards are typically linked to the prime rate, meaning their interest rates vary with the Federal Reserve’s policies. Instead of allowing the impending rate reductions to decrease their profits, many issuers proactively raised rates when the market anticipated a shift in the federal funds rate.

An analysis reveals that average APRs on retail cards grew by 1.52 percentage points in the year leading to September 2024, contrasting significantly with the marginal increase of 0.08 percentage points seen in traditional credit cards during the same timeframe. This indicates a distinct trend pertaining to store cards, which recorded a dramatic spike in rates.

Many retailers provided vague explanations for the increases, citing general industry practices and economic conditions. A spokesperson for Big Lots highlighted their commitment to responsible APA adjustments in collaboration with their banking partners, striving to maintain consumer purchasing power. Similarly, Nordstrom claimed that its pricing structure aims to stay competitive while adhering to a variable rate model.

However, the timing of these increases suggests a more straightforward motive: enhanced profits. Rossman notes that store cards represent significant revenue sources for retailers, pointing to a report indicating that close to half of Macy’s operating profits in 2022 stemmed from its credit card program.

This focus on profitability appears to be reflected in Macy’s recent performance, which has benefitted from rising credit card revenues. Despite some companies passing on rate cuts implemented by the Federal Reserve, average store card APRs remain at historically high levels, well above those from a year prior.

Interestingly, new account openings for private label credit cards have declined over the last several years, as younger consumers increasingly gravitate towards alternatives like buy now, pay later schemes. As credit card delinquencies rise, the correlation between consumer credit health and increasing interest rates on easily accessible credit options becomes evident.

Yet, the rate increases have not been targeted solely at consumers with poor credit scores. As illustrated by the experience of Macy’s customer Brian Robin, even those with solid credit backgrounds are facing the consequences. Robin, a 59-year-old public relations professional, found the rate hike unjustifiable given his strong credit history and consistent payment record. He expressed frustration, stating, “It makes me less inclined to shop at Macy’s. Who wants to spend at a place offering loan shark rates?”

— Additional reporting by CNBC’s Stephanie Landsman.

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