With the holiday shopping season driving major purchasesand new foot traffic through stores, retailers offering private label creditcards (PLCCs) have an opportunity to present credit offers to potentiallymotivated consumers. In-line credit applications and approvals are amajor channel for retailers to market these cards, and the holiday seasonpresents a major marketing opportunity.
Promotional credit offers can be particularly motivatingto consumers making major purchases, but can hold consumer risks as well. A new CardHub study has identified that 69% of merchants offering financingoptions with new private label credit cards offer deferred financing options:
Withthese payment programs and credit cards, you’re told that you won’t be chargedany interest for the first six months or more. But even if finance chargesaren’t showing up on your monthly statement, “shadow interest” is accumulatingbehind the scenes, explains Gerri Detweiler, director of consumer education atCredit.com. Once the grace period ends, consumers who haven’t paid off theirbalance in full—or in some cases, who have simply made one late payment—willsee a lump sum of back interest added to the remain balance.
Lotsof people end up in this worst-case scenario. According to the ConsumerFinancial Protection Bureau, 43% of subprime borrowers who use this kind offinancing are retroactively charged interest on their purchases.
Andthe missteps can be very costly: The CardHub study found that, under a deferredinterest payment plan, paying off your credit card debt one month behindschedule or missing a single payment could increase your financing costs bymore than 27 times.
A recent Creditcards.com study also highlights thegenerally higher APRs of private label cards (as compared to general purposecards), and their generally smaller credit lines. It is easy forconsumers to use up these small lines, driving up their credit utilizationrate, and thus depressing their credit scores. Credit.com cites commonbuyers’ remorse with 49% of recent PLCC applicants expressing regret aboutopening the accounts.
Promotional credit remains a major marketing tool foropening PLCC accounts, and provides real value so long as the user understandsthe terms and complies with their most favorable terms.
Overview by Ken Paterson, VP of Research Operations for Mercator Advisory Group
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