Few retailers are happy about the role credit card reform played in this season’s holiday sales derby. Some say that the new legislation forced lenders to cut credit to consumers, thus crimping their holiday spending. Here’s the back-story — involving one of America’s leading big-box retailers.
The story begins — and ends — with a vicious cycle.
Let’s start in Washington — a place, ironically, where a lot of bad news for consumers begins. There, Congress last year passed the Card Accountability, Responsibility and Disclosure (CARD) Act of 2009. Noble in purpose, but wretched in execution, the law gave credit card companies until February 2010 before new reform rules kicked in.
The effect was akin to giving John Dillinger a week’s head start before chasing him after a bank robbery. Card companies took advantage of the “grace period” to hike rates and, more importantly to consumers during the holiday shopping season, cut credit limits. The move by card issuers was a twin blow to American consumers — the consumer Web site Billshrink.com estimates that the rate hikes alone cost U.S. cardholders $10 billion in 2009.
Another study by the Federal Reserve found that 50% of banks it surveyed raised interest rates and slashed credit limits even on consumers with decent credit scores.
The net effect was less credit — and less money — for consumers during the holiday season. Faced with higher monthly credit card bills, and a lower credit ceiling under which to operate, cardholders clamped down on spending, thus fueling a backlash among major U.S. retailers, who pointed the icy finger of guilt toward the CARD Act as the reason why shoppers cut back on holiday spending.
According to LowerMyBills.com, a division of credit scoring giant Experian (Stock Quote: EXPN), 55% of Americans surveyed in November and December of 2009 said they seek to “proactively avoid” credit card debt.
That’s not what retailers want to see. In an interview with Bloomberg, Target Chief Financial Officer Douglas Scovanner said the CARD Act triggered a spending slump that hurts retailers, and the economy. “It will mute the impact of the rebound that would have otherwise occurred,” Scovanner said. “Diminished availability of credit equals diminished spending.” Target said it lost 1.5% in comparable-store sales in November 2009 alone.
Another CFO, Edward Record of Houston-based Stage Stores Inc., told Bloomberg “We’re scared to death of what this law is going to do. It’s definitely going to hurt consumer spending.” Stage Stores operates 759 stores, including Bealls and Peebles, across the U.S. About a quarter of Stage’s revenue comes from major credit card purchases.
While nobody’s crying crocodile tears for the credit card companies, which deserve all the disdain the American consumer can muster, retailers are another story. With the difference between recording store profits a thin one, it appears that credit card reform has hurt retail businesses more than it’s helped — so far, at least.
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