Credit's Due: Increased Consumer Buying Power Necessitates Greater Consumer Responsibility

As with early proprietary store cards, private label cards still help customers to make large purchases that they otherwise might not be able to pay for all at once, such as appliances, home entertainment systems, or Christmas gifts for a household. Retailers that sell high-ticket merchandise also offer deferred financing options for cardholders. Home Depot Consumer Credit Card customers are incentivized to sign up in-store or online by a 10% discount (up to $200) off their initial purchase, with an alternative to choose no-interest special financing for 6-24 months depending on the amount of purchase. Likewise, for certain categories of purchases (e.g. heating and air conditioners, building materials, riding lawn mowers, etc.), 12-month no-interest financing is available with an initial application.

Consumers' buying power is extended even further with the incentives, discounts, and special offers provided by merchants. For instance, new GapCard holders receive 15% off their first in-store purchase and earn 5% back on purchases, receiving $10 reward certificates for every $200 spent. Those who meet certain criteria will automatically be upgraded to Gap Silver status, which provides additional benefits, such as free shipping on all online purchases; 15% off a sale day of the cardholder’s choice (“Choose Your Own Sale Day”); Silver-only offers and shopping events, such as Triple Points Days; and basic alterations on all sister-store Banana Republic purchases.

Private label credit cards are easier to obtain than general-purpose cards—although somewhat less so with the enactment of the Credit Card Act in February 2010, which now makes it more difficult for applicants under 21 to obtain cards without the proven ability to make payments or viable cosigner to open the account.

Since they can be used only at one chain or a family of chains, there is less risk of the customer running up a tab he can't pay. Whether this is good or bad for lower-income consumers is subject to debate. A store card does make it possible for people to buy costly items that are necessary to daily functioning (e.g., a new refrigerator). However, if a consumer does not have a general-purpose credit card he may lack the experience to manage credit wisely, or he may not have a card because she has mismanaged her finances in the past. The problem is exacerbated by the relatively high interest rates typically imposed on store cards. The APR for general-purpose and co-branded cards is usually based on the cardholder's credit rating, and younger or lower-income consumers might not have much of one. Retailers can and do keep shoppers from running amok by imposing low spending limits on their cards; but that doesn't guarantee the customer won't default.

This blog is based on the Packaged Facts report Co-Branded and Affinity Cards in the U.S., 7th Edition (published July 2019) and was written by our analyst David Morris.