New Fed Rules Bad News for Store Credit Cards

By Eva Norlyk Smith, Ph.D.

The Federal Reserve is contemplating new rules for issuing credit cards, which could put at risk instant store credit cards and seriously cram the style of large retailing chains like Macy’s, Saks, Talbots, Best Buy, and others.

If enacted, the new rules could require retailers to collect detailed financial information from consumers applying for a store credit card, including information about their income and assets. Currently, consumers applying for an instant credit card at the check-out register in stores are approved only on the basis of their credit scores. Credit scores do no take into account income, but rather are based on the payment history and credit usage characteristics of the consumer.

The new rules proposed by the Fed come in response to one of the provisions in the Credit CARD Act, which was signed into law by Congress in May. The law requires that the consumers’ ability to pay off debts accrued be verified before a new credit card is issued. The responsibility to flesh out the specifics of how the new rules should be carried out falls to the Fed.

The new rules proposed by the Fed require the evaluation of the creditworthiness of consumers applying for a credit card to include “a review of the consumer’s income or assets as well as the consumer’s current obligations.” In addition, the Fed wants credit card issuers to establish procedures for considering that information.

Large retailers are lobbying against the proposed rules, arguing that it would be challenging and awkward to ask customers to give out information about their income and assets to the check-out clerks in retail stores, effectively discouraging shoppers from applying for an instant store credit cards.

“The proposed rule would curtail or eliminate many routine credit granting practices that are safe, valued and desired by both retailers and our customers,” NRF senior VP and general counsel Mallory Duncan said in a recent press release. “The effect of the proposed language would be much more disruptive than we believe was ever intended or envisioned by Congress.”

As much as concern for their customers, retailers also have their own interests at heart. Many retailers lure in new customers with offers promising them to get 10 to 15 percent off their purchase if they open a store-brand credit card with the retailer. They are not doing this just to be nice: store-branded credit cards are great for the bottom line.

Consumers with a store credit card spend more at the store than those without, and shop more frequently at the store. Store credit cards generally have higher delinquency and default rates, in part because consumers charge more, and in part because financially strapped consumers prioritize keeping their credit line open on general purpose bank credit cards, which can be used for everyday expenses.

The new rules are being hailed as a victory by consumer advocates, who argue that stores for too long have been pushing easy credit on consumers, tempting them into overspending, and contributing to mounting levels of credit card debt.

Published: December 23, 2009