Bankruptcy

Federal Reserve Proposes New Limits on Store Credit Cards

By Chris Kramer

According to the Wall Street Journal, the Federal Reserve has proposed new regulations that would restrict retailers' ability to issue store-specific credit cards. Many major retailers, it seems, are not happy about the prospect.

Prove You Can Pay

The new proposal, if adopted, would require store-card applicants to prove their ability to pay their bills when they apply for their cards. Many commentators believe this would amount to presenting a pay stub before being able to fill out a form.

• Based on the Credit CARD Act: One provision of the Credit CARD Act of 2009, set to take full effect in February 2010, requires lenders to verify that borrowers are capable of repaying loans before lending money. The proof of income requirement for in-store cards is, apparently, an application of this provision.
• Displeasure from retailers: Perhaps unsurprisingly, retailers are less than thrilled about the potential for this rule to change the way they operate. Many retailers currently offer tempting incentives to shoppers to open store cards, including one-time discounts and rewards programs.
• Support form consumer advocates: On the other side of the coin, though, those concerned primarily with consumer rights have hailed the proposed measure as an important move toward limiting too-easy credit.

How Well Do We Pay?

So how likely are Americans to default on their store-specific cards? Sources indicate that store-branded (also called private-label) cards tend to be higher than general purpose plastic.

This makes sense: if you?re struggling financially and only able to make payments on some of your cards, it?s smarter to stay current on cards that can be used at a variety of locations rather than on one that?s only good at a single retailer.

But, it seems, even this less-than-stellar track record doesn?t make retailers eager for a change. Here?s why:

• Sales volume: WSJ reports that Macy?s, one major retailer that issues a store card, saw more than half of all its sales bought on store cards in Q3 of this year.
• Salary is a private matter, and few Americans are likely to be comfortable with handing evidence of their income to a stranger behind a register, no matter how much they make.

The Federal Reserve has not yet announced when this proposed rule will be completed.

Additional Resources

Credit CARD Act of 2009 (PDF)

Full post as published by The Bankruptcy Blog on December 11, 2009 (boomark / email).