New Economic Realities   //   January 16, 2023

‘There’s always going to be this trade-off’: What roadblocks await retail credit cards

Retail credit cards are as costly as they’ve ever been in terms of interest rates, and, in some ways, in terms of risk.

According to the latest study from, the average annual percentage rate (APR) for a retail credit card sits at 26.72%, a record high. This is more than 2% higher than 2021’s average and 4% higher than the average APR of a general-purpose card. Some retail cards go even higher, with the Kroger Rewards World Elite Mastercard advertising a maximum APR of 31.24%.

The high rates come as many major retailers that relied on these cards for earnings are struggling, and as alternatives to credit cards — like buy-now-pay-later (BNPL) services — are gaining momentum.

The high APR rates are a double-edged sword for retailers. If the cards are popular among shoppers, they can generate a large amount of supplemental revenue for companies. On the other hand, the high interest rates may be a deterrent for customers who are closely watching their spending in the lead-up to a possible recession. As Andrew Lipsman, eMarketer principal analyst at Insider Intelligence, told Modern Retail, “there’s always going to be this trade-off.”

What makes things more complicated is that many shoppers, especially younger ones, are leaning into BNPL services like Klarna and Afterpay. These allow customers to pay in installments and won’t typically charge interest if a person can pay their full 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, per GlobalData.

Historically, retailers have relied on branded 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 yearly 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 re-evaluate their priorities and a new generation of shoppers heads to the registers. As these companies, particularly department stores, work to stay relevant, they may need to look elsewhere to boost their bottom lines.

Many retailers are likely hoping these higher rates can help them get out from under slowing growth. Macy’s, which has offered a credit card for years, lost 3.9% in net sales during the third quarter, compared to 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 is “substantial doubt” 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. It made $320 million in net revenue from credit cards in the nine months ending Oct. 29, 2022, compared with $283 million in the nine months ending Oct. 30, 2021.

The rise of retail credit cards

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

For many retailers, “credit cards were that additional revenue stream well before retail media and digital advertising ever 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, among others. The average American had three credit cards and 2.3 retail store cards in 2021, according to a survey by Experian.

These cards often come with a flurry of perks, including cash back and free shipping, all of which can entice a customer at the point of check-out. Sephora, for example, gives cardholders 25% off their first purchase made within 30 days, 4% back on Sephora items and a faster way of earning Beauty Insider points. The Target REDcard credit card gives cardholders 30 extra days for returns, 5% off all purchases at Target and and free shipping on most items.

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

Compared to other credit cards, retail credit cards are easier to get, which can help those who are still building their credit, Lambarena said. Store credit cards also might offer special financing, although Lambarena warned 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. In addition, “some store credit cards can only be used with that specific retailer or partner brands. And sometimes, the rewards redemptions come with limitations or restrictions.”

Some cards, like Verizon’s Visa card and the Amazon Prime Rewards Visa signature card, will give cash back on purchases made at other retailers. There are also many rewards cards not affiliated with stores, which give  cardholders cash or points to use towards merchandise or gift certificates at stores of their choosing.

‘Avoid choosing… on impulse’

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

However, “in the same way that there’s leverage if you can grow this revenue stream, there’s also deleveraging that can happen on profits if the revenue stream starts to decline,” he explained. “If the trends are not in your favor, there’s real risk if that revenue stream encounters headwinds and maybe sees declines that can really depress a company’s bottom line.”

While credit cards are still 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 younger generations. BNPL services, in particular, are also eating up a larger 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 set to hit 59% and 53.6%, respectively, by 2026.

More BNPL brands are also partnering with retailers to be featured in physical stores. Affirm, for instance, has run in-store marketing campaigns with partners like Audi, Warby Parker, Walmart, The RealReal and Dick’s Sporting Goods. Sephora, which has its own credit card, has even teased Afterpay at check-out.

The prospect of credit card debt is also a drawback. Card balances for U.S. customers reached 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 a 15% increase from the year before.

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

“Avoid choosing a store credit card or a buy-now-pay-later plan on impulse upon checking out,” she said. “Take the time to read over the terms and conditions and understand how those options work before choosing them.”