Retail Cards RevampedRetail stores seem to be pushing their store credit cards aggressively this holiday season, but for better or for worse, new regulations could make it more difficult to charge purchases at your favorite department store using their plastic.
Eventually, you may even have to show a retailer proof that you can pay off debts before you can get a store credit card if specific interpretations of new card rules are approved by the Federal Reserve, notes The Wall Street Journal.
That’s because new rules say that creditors have to consider a customer’s ability to pay off debt before granting credit, and that may include retailers offering credit cards as well.
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No More Easy Access?If new credit card legislation applies to store cards, consumers will no longer have access to instant credit at their favorite stores, according to the National Retail Federation, a group that includes various types of retailers (department stores, specialty stores, discount stores, independent stores among others).
And not only would department stores like Macy’s (Stock Quote: M) and Sears (Stock Quote: SHLD) as well as clothing retailers like Express and Gap (Stock Quote: GPS) take a hit, but consumers would be forced to find other sources of credit. Or perhaps we could stop using credit cards all together. Meanwhile, debit card use is now up more that credit card use, according to recent reports.
Besides not having easy and immediate access to credit, here’s what you can expect if new store card rules are accepted.
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Proof On Paper
To prove your credit worthiness, based on one interpretation of new credit card rules, you may have to provide a tax form or pay stub with information on your income as evidence that you can pay off debts, notes Credit.com. If you’d rather not disclose that kind of information, you may be out of luck getting a credit card.
But while stores can judge your credit worthiness based on your income, under the Equal Credit Opportunity Act, there are other factors that creditors aren’t allowed to use in determining your credit worthiness, including you marital status, national origin and whether you receive any kind of public assistance, like food stamps for example, the Federal Trade Commission notes.
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The Death of Discounts?One of the biggest incentives to getting a store credit card now is the percentage discount you can get on your first transaction, a particularly tempting plus when you’re making big holiday purchases. Those initial discounts are what make many consumers agree to apply for a card in the first place.
This can be good or bad. If you’re a responsible credit card user and pay off your balance each month, like more than half of credit card holders do, according to Credit.com analyst Gerri Detweiler, those discounts can make store cards a great idea. If you carry a balance, however, what you pay in finance charges could exceed your immediate savings from discounts by far, especially considering that interest rates on store credit cards can be significantly higher than what you’d get on a regular consumer credit card.
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Hiding Your HabitsIn addition to your sign-up discount and the occasional added discounts, retailers can use your store card to track your spending habits, and even use that data to tailor specific offers to you. While this kind of data tracking may make some consumers uneasy for privacy reasons, you can also miss out on the discounts that could help you the most.
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Rules Could BackfireIf stricter store-brand credit card rules are adopted, it could change how retailers sell and shoppers shop in general. But the same way credit card companies and cardholders are still uncertain about the side effects of new rules will be down the line, it’s still unclear what retailers’ strategies will be to make up the significant revenue attributable to store brand credit cards. For example, if the credit card company method were also taken up by retailers, one might think that prices in retail stores would go up just as APRs have.
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Dependence on Credit ScoresSince income will become a factor in determining your credit worthiness, your credit score alone, as they’re presented now, won’t be enough to determine whether you can get a card. That can also mean that even if you have a perfect credit score or you’ve been using yours responsibly, but you have a low-paying job, you could lose out.
The need for proof of income could change the whole credit scoring process however. “It’s possible that the credit reporting agencies could try to shore up [income] information on credit reports,” suggests Detweiler. “Maybe they could step in and be a more reliable resource, but whether or not they would want to take that on or whether regulators would say that’s OK is another thing.”
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Hurdles to Establishing CreditUntil now, getting a store brand credit card, and getting a credit limit in the thousands could be shockingly quick and easy. And your activity on those cards could help you establish credit. Not having easy access to store cards could make it harder for some consumers to establish credit.
“You might apply for a credit card issued by a local store, because local businesses are more willing to extend credit to someone with no credit history,” according to the Federal Trade Commission. “Once you establish a pattern of making your payments on time, major credit card issuers might be more willing to extend credit to you.”
However, you’ll have to make sure that your activity on local credit cards come through on your credit report. While store cards from national department stores are included in your reconds, cards from local credit unions, gasoline card companies and local retailers usually aren't included, the FTC says.
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Outrageous APRsCurrently, if you can sift through the fine print in the terms of your credit card agreements, one of the biggest differences between store credit cards and regular consumer credit cards is the amount of interest you have to pay on your purchases when you carry a balance.
In fact, many store credit cards come with APRs of close to 30% compared with 11.7% on average for variable-rate cards. If that remains the case, you may not even want to think about using these cards unless your discount is better than the extra you’ll pay in finance charges.
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Less TemptationAll of these new rules also mean that store credit cards could become such a turnoff that more people will rein in their spending and maybe even stop using them entirely. The urge to splurge on big purchases, especially over the holidays, may subside when you consider the mutual chokehold regulators and credit card companies have on each other, with consumers stuck in the middle.
Do you have a store credit card, and does using it pay off for you? Let us know in the comments below.
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