Private Label Cardholders Revolve Their Balances More Often

Auriemma Consulting Group conducted research on private label cards with 402 credit cardholders in July 2011.  Almost half (47%) of the cardholders had private label credit cards.  Private label cardholders were more likely to carry a balance than bankcard holders.

Private label cards are issued by retailers to be used at their stores to purchase merchandise. These cards are limited to the places that accept them, and the balances and credit limits are lower than those of bankcards. Because the underwriting criteria are less stringent than bankcards, the risk is higher to the card issuers and interest rates are higher.  This is reflected in higher charge-off rates on private label cards.  According to Fitch, as of June 2011, the average charge-off rate on private label cards was 9.45% and for bankcards was 6.33%

Research highlights

7% of responders cancelled a bankcard; 3% canceled a private label card.

40% of those that canceled private label cards in the previous year did so because of high interest rates.

60% of credit cardholders who revolved (carried a balance) on bankcards also revolved on private label cards.

49% of responders had never paid off a balance on either card within the previous one to four years.

Those surveyed spent more annually on bankcard and debit cards than on private label and charge cards.  They spent 48% on bank credit cards, 32% on debit cards, 14% on private label cards and 6% on charge cards that require payment in full.

Most private label cards were opened at the store at the time a purchase was made, 23% opened an account online and 9% through direct mail.  There are usually incentives at point of sale to help convince you to apply for the card. As can be expected, private label cards are used mainly for the discounts, rewards and special promotions.  Here is the breakdown:

38% used the card because of a percentage discount at the store.

34% used it because of the rewards program.

34% used it because of special promotions.

24% used it because they liked the merchandise offered by the store.

13% used it because of the special financing available with the card.

Based on this survey, private label cardholders are more prone to carry a balance and are attracted to the discounts, rewards and special promotions offered by these cards. Retailers target this customer group, because they are more profitable.

It’s no secret that I am not fond of private-label cards because of the higher interest rates charged.  I prefer to carry fewer credit cards and use those accepted at any business, retailer, restaurant, etc. If you use private label cards, try to pay them in full each month, and use them to get the benefit of the discounts, only.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Credit Report, Credit Score, Debt, Debt Management, Money & Identity

This post was written by John Ulzheimer