Retailers Target, Nordstrom hit crunch with branded cards

— -- Many retailers have a store-branded credit card, a strategy to encourage shoppers to spend more in their stores. The majority, though, have unloaded their credit card portfolios to banks in recent years, meaning that much of the profits and the risk on the store-branded card belong to the partner bank.

Yet, Target and Nordstrom, among a handful of other retailers, defied this trend, which looked like a smart move when times were good. Retail credit cards typically charge interest rates of 20% of more, much higher than other credit cards, says Curtis Arnold, founder of CardRatings.com, a site that rates credit cards. The higher rates provide a bigger boost to issuers' profits.

But when the economy sours, those rates can make it harder for consumers to pay their bills, pushing charge-offs — when banks give up on collecting debt — on retail cards higher and faster than on general-purpose cards.

Now, analysts say Target and Nordstrom would be hard pressed to get decent offers on their card portfolios, though Target sold just under half its card business earlier this year.

Target CFO Douglas Scovanner, on a recent conference call, said credit cards are the company's "second-largest challenge."

In the past year, the net charge-off rate on retail cards has jumped 2.4 percentage points to 8.1%. The charge-off rate on general-purpose cards has risen only 1.7 percentage points to 6.08%, according to industry newsletter Nilson Report.

"If push comes to shove, and you had a card that could only be used (at one store) and another card that could be used everywhere, which bill would you pay?" asks David Robertson, publisher of Nilson Report. "The proprietary cards go unpaid."

Retail analyst Jennifer Black calls Nordstrom's situation "something to watch," but notes that the retailer started tightening credit as soon as it saw the California economy start to weaken, mitigating its risk.