For at least two decades, retailers used the lure of easy store credit to drive sales, even if it meant extending the option to consumers with low income, poor payment records or no credit history at all.
As long as the economy was good and the credit card holders were employed, retailers took their chances on risky borrowers and charged hefty interest rates and fees to make up for it.
But in a shaky economy, the formula has failed -- prompting at least seven retailers this year to turn over the administration of their credit card operations to third parties, according to industry analysts.
Circuit City Stores Inc., one of the nation's largest consumer electronics chains, became the most recent example this month when the Richmond-based company put up for sale the money-losing portion of its credit card operation. The retailer said the unit's high default rates and sinking profits were drains on its finances and a distraction from its retail business.
The announcement came about a month after Sears, Roebuck and Co., a pioneer in the credit card business, said it would sell its troubled credit card division to Citigroup Inc. for about $3 billion, probably later this year.
"We've entered into a new era in the finance world," said Robert McKinley, chief executive of CardWeb.com, a Frederick , Md. firm that tracks the industry. "Around 2001, when people started losing their jobs, one of the first things they would stop paying on was their credit cards. Ever since, it's been a real learning experience for the industry. It got out of control for these retailers."
Spiegel Inc., one of the nation's oldest catalogue operators and owner of the Eddie Bauer clothing chain, filed for bankruptcy protection in March, in part because its credit card business had failed. It has since started offering private-label credit cards through a third party, Alliance Data Systems Corp.
Last year, Saks Inc. sold its private-label credit card business to consumer lender Household International Inc. for more than $300 million. J.C. Penney Co. sold its credit card operations in 1999 for nearly $4 billion to GE Capital, General Electric Co.'s financial arm.
Sears's decision got the most attention because the retailer had the largest private-label program in the country. When Sears started issuing MasterCards three years ago, it became the 10th-largest issuer of bank credit cards, according to the Nilson Report, a payment card trade journal based in California.
Like Sears, many retailers that entered the credit card business offered cards that could be used only in their stores. The goal was to boost sales and improve customer loyalty by handing millions of consumers new buying power and added convenience.
Some began expanding into MasterCard and Visa cards after Congress allowed them in 1987 to form federally chartered, limited-purpose credit card banks.
By having their own banks, retailers for the first time could issue general-purpose cards. And because the banks were federal, they could charge interest at the highest rate permitted by the states the banks were in.
Before 1987, retailers that offered private-label cards were only allowed to charge the highest interest rates permitted by the state the cardholder lived in. Because the states had different ceilings, these cards were a cumbersome business for national chains.
With the general-purpose card, retailers gained flexibility and a new revenue stream generated outside their own establishments.
As long as the economy was good and the credit card holders were employed, retailers took their chances on risky borrowers and charged hefty interest rates and fees to make up for it.
But in a shaky economy, the formula has failed -- prompting at least seven retailers this year to turn over the administration of their credit card operations to third parties, according to industry analysts.
Circuit City Stores Inc., one of the nation's largest consumer electronics chains, became the most recent example this month when the Richmond-based company put up for sale the money-losing portion of its credit card operation. The retailer said the unit's high default rates and sinking profits were drains on its finances and a distraction from its retail business.
The announcement came about a month after Sears, Roebuck and Co., a pioneer in the credit card business, said it would sell its troubled credit card division to Citigroup Inc. for about $3 billion, probably later this year.
"We've entered into a new era in the finance world," said Robert McKinley, chief executive of CardWeb.com, a Frederick , Md. firm that tracks the industry. "Around 2001, when people started losing their jobs, one of the first things they would stop paying on was their credit cards. Ever since, it's been a real learning experience for the industry. It got out of control for these retailers."
Spiegel Inc., one of the nation's oldest catalogue operators and owner of the Eddie Bauer clothing chain, filed for bankruptcy protection in March, in part because its credit card business had failed. It has since started offering private-label credit cards through a third party, Alliance Data Systems Corp.
Last year, Saks Inc. sold its private-label credit card business to consumer lender Household International Inc. for more than $300 million. J.C. Penney Co. sold its credit card operations in 1999 for nearly $4 billion to GE Capital, General Electric Co.'s financial arm.
Sears's decision got the most attention because the retailer had the largest private-label program in the country. When Sears started issuing MasterCards three years ago, it became the 10th-largest issuer of bank credit cards, according to the Nilson Report, a payment card trade journal based in California.
Like Sears, many retailers that entered the credit card business offered cards that could be used only in their stores. The goal was to boost sales and improve customer loyalty by handing millions of consumers new buying power and added convenience.
Some began expanding into MasterCard and Visa cards after Congress allowed them in 1987 to form federally chartered, limited-purpose credit card banks.
By having their own banks, retailers for the first time could issue general-purpose cards. And because the banks were federal, they could charge interest at the highest rate permitted by the states the banks were in.
Before 1987, retailers that offered private-label cards were only allowed to charge the highest interest rates permitted by the state the cardholder lived in. Because the states had different ceilings, these cards were a cumbersome business for national chains.
With the general-purpose card, retailers gained flexibility and a new revenue stream generated outside their own establishments.
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