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Why Do Private-label Credit Cards Still Exist?

There are a very few situations in which a store card, used responsibly, can be a positive thing. Those with limited credit histories may find themselves more likely to be approved for one than for a mainstream credit card. And, for those consumers, having one can help establish their creditworthiness.

Store credit cards and the Lazarus effect

What's strange, though, is that store cards remain as successful as they do when they offer so little to so many people. But they continue to do well. Writing in the American Banker magazine in December, Eric Lindeed traced their recent history. Only a couple of years ago, they were seen as a thing of the past. Retailers and financial institutions were tripping over each other in their eagerness to divest themselves of their private-label card businesses.

Lindeed identified four reasons why companies have again come to love them so much:

  1. Private-label transactions are cheaper for the retailer to process because they have to pay lower or zero swipe fees.
  2. Store cards can help a retailer to build a relationship with a customer thereby promoting loyalty.
  3. Oddly, they carry a low credit risk. Perhaps because their credit card rates are so high, consumers tend to repay store-card debt first and so default less.
  4. They increase sales. If you can't afford to buy something with cash or a mainstream credit card, you might go ahead and buy it if the store's offering you the finance you need.

Hmmm. Sounds a good deal from the retailers' and lenders' points of view. But that doesn't explain why so many consumers find store cards so alluring. That remains a mystery.

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