The Lure of Store Credit Cards, and the Hook/Redeem All of Gift Card, or Give Store a Present

The Lure of Store Credit Cards, and the Hook
By TARA SIEGEL BERNARD
Copyright by The New York Times
Published: December 11, 2009
http://www.nytimes.com/2009/12/12/your-money/credit-and-debit-cards/12cards.html?th&emc=th


You may be tempted this season to give in to the plea from that persistent sales clerk at one of the big retailers — “Are you sure you don’t want to save 15 percent today?” — and open up a couple of store-brand credit cards. After all, a 15 percent discount, or no interest payments for 18 months, sounds enticing when you are buying gifts by the armful.

Rules set to take effect in February require consumers to list more information on card applications, like income and assets.

But before you start filling out the application, there are some things you need to know. If you carry a balance on store-brand cards, known in the industry as private-label cards, or if you miss a payment on your no-interest purchase, you can end up wiping out those initial savings, and then some. And when you open a new credit card, your credit score can suffer, too.

As one expert put it, if you strip away the store discounts and brand names that come with these cards, many are essentially the same products marketed to subprime borrowers, or individuals with tarnished or fairly new credit histories. Would you really chose a card with an interest rate of say, 25 percent, or about 9 percentage points higher on average than many other credit cards?

“You are typically not getting the card because it has a lower interest rate or the financing is attractive,” said John Grund, a partner at First Annapolis, an advisory firm focused on the payments industry. “The first-purchase discount or, in the case of big-ticket items, promotional financing, is attractive to consumers. Then, it’s a function of ongoing benefits.”

Congress was aware of the lure of easy credit, so the credit card legislation it passed this year asked regulators to come up with a way to evaluate consumers’ ability to pay their credit card bills before they get the cards. Indeed, the Federal Reserve’s proposed new rules, set to take effect in February, require consumers to list more information on their card applications, like their income and assets.

But while that sounds like the new rules will make it tougher to get that store credit card, don’t bet on it. Retailers are not required to verify that information, and they have told the Fed that the quick check of credit scores they now do is adequate. Besides, they said, customers standing at the checkout may not be comfortable giving clerks sensitive information like a pay stub.

Chi Chi Wu, a staff lawyer at the National Consumer Law Center, said the proposed rules did not go far enough. “The Fed explicitly cited the fact that it didn’t want to hinder retailers from being able to instantly open credit card accounts at point of sale as the reason for not requiring verification,” she said. “We think that is not a good reason, since the current financial crisis was caused in part by the failure of lenders to ensure consumers could afford the loans they are given.”

In all the bustle of holiday shopping, the retailers will be counting on you to focus on all the benefits of these cards — and the benefits can be valuable, if you know how to use them. But you should also be considering the card’s terms along with the possible effect on your credit score. If you are looking to refinance your home, buy a new one or take out an auto loan, you may need every last point to buoy your score.

“If it costs you 5 or 10 points and it drops your score to 790, it’s a nonissue,” John Ulzheimer, president of consumer education at Credit.com, said. “But if takes your score from 700 to 690, that is a problem.”

There are several reasons opening one or more cards may drag down your credit score. First, the credit-scoring companies do not look fondly on new applications for credit. Inquiries stay on your credit report for two years, though they only count toward your score for the first 12 months. Once you get the new card, the new account itself also weighs on your credit standing for several months, in part because it reduces the average age of your credit history, which accounts for about 15 percent of your score.

Of course, if you have a pristine credit history and thousands of dollars in available credit on general-purpose cards (the type issued by MasterCard, Visa or American Express), you don’t have to be overly concerned about opening a store-only card, which tends to carry much lower credit lines. You are also more likely to qualify for what is known as a co-branded card, where a retailer like Toys “R” Us partners with a bank that issues a MasterCard, which can be used anywhere and carries somewhat lower interest rates.

“If I am someone who has the optimum mix of six or seven cards, it’s probably not terribly material as opposed to someone who is new to credit or who has a lower score,” said Shon Dellinger, vice president of myFico.com, which provides consumer information and credit products. “But if you’re shopping around and open up four cards to save 20 percent on each, that’s really not the right mind-set.”

In fact, people with less-than-perfect credit can be more harmed by opening a private-label card and carrying a balance than if they opened a general-purpose card. That’s because the credit limits are typically much lower — say, around $500 — than those of a traditional credit card. “So what happens is even modest purchases, a suit or some boots, can cause that card to be highly utilized because of the fact that it has a low limit,” Mr. Ulzheimer said. “The purchase might be negligible on a regular MasterCard or Visa.”

And your so-called credit utilization rate factors into your credit standing. When computing your FICO score, Fair Isaac, the company that developed the score, considers how maxed out each of your individual cards is, as well as your total amount of debt — and how that compares with your total available credit.

There are other reasons to read the fine print before getting these cards. Some retailers offer promotions where you do not pay interest for a certain period, as long as you pay off the balance by the time the promotional period ends. But if you do not pay off the balance, you will owe interest on your average balance during the promotional period — but interest will accrue starting on the date you bought the item. So if you bought a $1,000 television and you have paid off $800 by the end of the promotional period, you will still owe interest on your average balance, dating back to the day you bought the TV.

Sears and Best Buy are now running no-interest promotions. But if you participate in one of these plans, you need to pay attention to the date the promotion ends. At Sears, promotions begin on the date you make your purchase, said Chris Brathwaite, a Sears spokesman. That means if you bought the TV on Dec. 12, 2009, the bill must be paid off by the same date a year later — even if your statement happens to arrive on the 14th of each month, Mr. Brathwaite said.

Since most store cards have higher rates than most general-purpose cards, you do not want to fall behind. And if you do, you can do major damage to your credit score. Those with a FICO score of 780 — the scale ranges from 300 to 850 — who are 30 days or more overdue can lose 90 to 100 points from their scores, Mr. Dellinger said.

“Only get credit if you need it, and if you do get it, make sure you aren’t overextending yourself so you can do some of the basics like paying your bills on time,” he added.









Redeem All of Gift Card, or Give Store a Present
By RON LIEBER
Copyright by The Associated Press
Published: December 11, 2009
http://www.nytimes.com/2009/12/12/your-money/credit-and-debit-cards/12money.html?th&emc=th


Like it or not, gift cards are now a fixture of the holiday season. And this year, some of the changes in the card world seem favorable at first glance.

Nearly $5 billion of the money that is given this year as presents on gift cards is likely to go unspent.

Last month, the Federal Reserve proposed new guidelines for the industry, rules that legislators had outlined in the sweeping credit card legislation that passed earlier this year. They prohibit fees for cards that have been inactive for less than a year, outlaw expiration of funds within five years of when someone has loaded the cards with money, and call for clear and conspicuous disclosures.

That is fine as far as it goes, though most major retailers already follow these rules. American Express, which issues cards that are good at any retailer that accepts its plastic, went even further. It did away with all consumer fees, other than the ones you pay to purchase and load the gift card in the first place.

But a big problem remains, and it’s awfully hard to legislate away. This year, nearly $5 billion of the money that well-meaning givers have put onto gift cards will go unspent, according to TowerGroup, a financial services consulting firm. The money then reverts back mostly to the retailers and banks that loaded the plastic initially.

In the industry, this is known as breakage, and here’s what it means: If you buy a gift card for a family member or friend, there’s a good chance you’ll give a little gift to the retailer or bank that issued it as well.

How does breakage happen? People lose their cards. Or they abandon them in a drawer and assume they’re expired when they’re unearthed years later. Fees can still eat away at some of them. And people may use $46 of a $50 card and then throw it out rather than make another trip back to the store.

The most obvious question here is whether retailers and banks like it when this happens. On one hand, enlightened companies may see the cards as akin to frequent-flier miles. Customers are unhappy when any miles expire, and if they are able to redeem them easily, they’re more likely to patronize the airline and collect more miles in the future. That’s how loyalty works, and one would assume that gift card issuers want to create the same seamless experience.

Some third-party providers that set up gift card systems see it a bit differently, however. Head over to the Gift Card USA home page, and you’ll see the company behind the site announcing: “Experience shows that 5-15% of gift card values are never redeemed. This fact can pay for your program by itself.”

It isn’t just a break-even proposition either, according to the people behind Acceptvisamastercards.com. If you count 10 to 12 percent breakage in your calculations, the site contends, the gift card display can become the “most profitable square foot of space in the place.”

This is how some of the people in the industry talk about gift cards when they think consumers aren’t listening. And for big companies, breakage can add up to real money. Not every big retailer or bank discloses it, but Best Buy was kind enough to note that it kept $38 million in breakage in its most recent fiscal year. Home Depot cleared $37 million. Breakage can be total when a retailer goes out of business.

Retailers will generally still let you redeem your gift card many years after you received it. But they still record the revenue once they’re certain, based on historical redemption patterns, that most of the unspent money from years ago will stay that way. And yes, most of them do tend to keep it, though some states may try to seize the money as unclaimed property (which leads many companies to place subsidiaries in friendly states to try to avoid this).

Even as gift cards exploded in popularity over the last decade, it was reasonably easy to avoid getting them, as long as you put together a specific enough holiday wish list for friends and family. But recently, companies have started sending rebates in the form of gift cards, instead of old-fashioned paper checks. So you may end up with the cards whether you want them or not.

Why is this happening? Because you wanted it to happen, of course. “It’s the convenience,” said Cletis Hoffer, treasurer at Young America, a marketing company that specializes in rebates and has studied the issue in focus groups. “Consumers are more interested in getting a card than a check. You have to take a check to the bank. But with a card, you can spend it immediately.”

This makes little sense to me. I can drop a check in the mail to my bank in about two minutes. But with the gift card like the Citi Visa that I recently received from Verizon, I have to remember to put it in my wallet and take it out at a store. Then, I need to find a retailer where the people at the register won’t look at me cross-eyed when I request that they split the transaction between the gift card and another form of payment. It holds up the line, too.

At least that Citi card gives you the right to take its gift card to any Visa member bank and extract the cash. I took it to archrival Chase. The transaction was seamless and it took just 10 minutes, five times as long as it would have for me to send a rebate check to my bank. I was that lucky, though, only because I work across the street from a bank.

Perhaps I’m in the minority in finding all of this a bit too complicated. “We have seen incredible increased utilization, in terms of people getting the cards down to zero, than we were two years ago,” Mr. Hoffer said. “Particularly the Visa and other cards.”

Brian Riley, the research director at TowerGroup, confirms that overall breakage numbers have fallen in the last year or two, as consumers have gotten wise to the disappearing funds. “People realize they can lose it,” he said. “And the fact that we’re in a bad economy gives the $3 a bit more meaning now.”

If you do end up with an unwanted card, there are a few ways to get rid of it. You could sell or swap it at Web sites like Plastic Jungle, GiftCardRescue and Swapagift, though you’ll lose some of the card’s value in the process. A charity might take it off your hands, too.

If you’re going to use the card, try buying something that costs a bit more than the loaded amount, so you’re not faced with a tiny leftover balance that you’ll be tempted to abandon. If you have a Visa or similar card, calling a catalog merchant with an order may make you feel less sheepish than holding up lines with an in-person split transaction.

As a giver, it’s easy to tune all of this out when buying a card is so much easier than redeeming it. And recipients often treat it like found money; what’s a loss of $4 when the $96 you did get to use was money you didn’t have before?

But we could put an end to all of this waste if the givers got wise to the billions in annual giveaways to retailers and banks and just handed over cash. You’re kidding yourself if you think that loading money onto a plastic card is somehow more polite than slipping money into a paper envelope.

Nobody neglects to spend cash. The reason they came up with the word breakage is that the gift card system was more than a little bit broken.