Defaults on Retail Credit Cards Soar

By Eva Norlyk Smith, Ph.D.

Defaults on store-branded credit card accounts soared during the holiday shopping season, according to a report released Thursday by Fitch Ratings. On an annualized basis, credit card defaults on retail credit cards rose to 12.56 percent in December, up from 11.36 percent the month before. That’s an almost ten percent increase month over month, bringing default levels close to the all-time record for retail credit cards of 12.81 percent set in August of 2009.

The sharp rise in defaults comes after two months of declining charge-offs. Throughout the year, however, defaults on store credit cards have averaged 11.88 percent, considerably higher than its historical average of 8.34 percent. The Fitch index tracks retail credit cards issued by 165 major U.S. retailers, including Wal-Mart, Best Buy, and Home Depot.

The uptick in defaults on retail credit cards follows the trend in the rest of the credit card sector, but retail defaults top those on bank-issued credit cards by about 2 percent. Defaults on bank credit cards averaged 10.56 percent in November, according to Moody’s.

The record default rates on credit cards are linked to the continuing high unemployment rates, and they are expected to remain high at least through the first half of the year. Retail credit cards may be particularly vulnerable to defaults, as many offer less value and versatility to consumers. They typically come with lower credit limits, and some cards can only be used at the store they are co-branded with. As a result, consumers struggling to make ends meet often prioritize keeping their bank-issued credit cards in good standing, so they can continue to benefit from the greater versatility and higher credit line of those cards.

If the high credit card defaults on store credit cards continue, retailers may become far less aggressive at pushing offers giving shoppers 10 % off if they take out a store-branded credit card. Retailers may be forced to become more selective in offering new accounts and may also tighten the standards for approving new credit card applications.

The high defaults are a double whammy for retailers. They indicate that retail sales may continue sluggish, as financially strapped consumers are forced to pull back on spending and credit card usage. According to a recent report from the Federal Reserve, revolving credit usage, which is largely a measure of credit card usage, dropped by a record $17.5 billion in November, more than three times the average monthly drop in the preceding months.

On the bright side, late-stage delinquencies on store credit cards, i.e. credit card payments that are more than 60 days late, but which haven’t yet been written off, improved slightly, an indication that long-term charge-offs could be stabilizing.

Published: January 15, 2010