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Delinquencies Rise for Store Credit Cards

One less source of credit for some shoppers.

Forget Wall Street — consumers have their own credit crunch to worry about with store-branded charge cards and it’s about to get worse, according to a new report from Fitch Ratings.

This story first appeared in the December 15, 2008 issue of WWD.  Subscribe Today.

“Rising delinquencies will pressure card issuers and their retail partners during the coming year as Fitch expects a scenario akin to nearly one in eight cardholders defaulting on their store cards,” said Mike Dean, managing director.

The ratio of cards that were more than 60 days delinquent in November rose to 4.8 percent, up substantially from 3.9 percent in August and 3.7 percent in November 2007, according to Fitch’s Credit Card Index. Most of the cards in the index can only be used at the store that issued them.

Many retailers have branded credit cards and use them for targeted marketing programs and research, but few chains outside of Target Corp. or Nordstrom Inc. continue to handle the financial end of the business.

The rising delinquencies among store credit cards mean some retailers’ most loyal shoppers are having trouble meeting their financial obligations and could be paying off other, more widely used credit cards first, said Cynthia Ullrich, senior director at Fitch.

“In the current economic situation, [consumers] might have less utility for a retailer-specific credit card,” Ullrich said. “At some point, if you don’t have enough money, you’re not going to go to Ann Taylor to get a sweater.”

Since most retailers don’t own the back end of the business, they aren’t going to get caught with the bad debt on their balance sheets when consumers don’t pay.

Retailers might end up paying, though, in the form of lower sales as shoppers find they have one less place to turn should they lose their card privileges.

“That’s a source of liquidity for the consumers that they’re not going to have anymore,” Ullrich said.

For card issuers, charge-offs for bad debt are expected to surpass 12 percent in the first half next year, rising from 9.1 percent last month and 6.5 percent in November 2007.

This is one crunch, however, that shouldn’t immediately worry investors, at least those primarily concerned with asset-backed securities tied to credit card receivables. The credit ratings on such securities are not expected to be hurt in the near term, the rating agency said.

Fitch tracks more than $72 billion in principal receivables backing about $40 billion of retail or private label credit card-backed securities. Among the largest issuers in Fitch’s Credit Card Index are Citibank Omni Master Trust and GE Private Label Master Trust. The retailers include Wal-Mart Stores Inc., Sears Holdings Corp., Macy’s Inc., J.C. Penney Co. Inc. and Limited Brands Inc.