Consumers’ Use of Credit Cards: Store Credit Card Usage as an Alternative Payment and Financing Medium

This paper investigates consumers' use of store-issued credit cards with particular attention to their function as an alternative payment and financing medium. Using 1998 Survey of Consumer Finances data, the researchers found that credit availability through bankcards is negatively correlated with consumers' use of store cards as a financing medium, suggesting the role of store cards as a supplementary credit line. A negative relationship is also found to exist between consumers' bankcard usage and their use of store cards for a transaction purpose, indicating that store cards function as a substitute payment medium. Consumers' usage of store cards varies according to function and is related to a number of variables, including the use of bank cards, credit history, attitude toward credit, income, education, and ethnicity. ********** The importance of credit cards, both as a payment and short-term financing medium to today's consumers, is no longer debatable (Chakravorti and Emmons 2001; Hayhoe et al. 2000). The market share of credit cards in the total dollar volume of consumer payments in the United States increased from 14.5% to 21.4% between 1990 and 1998 (Nilson Report 1999). And, between 1991 and 2000, consumers' outstanding revolving credit (a category that includes installment loans as well as credit card debt) grew from $247 billion to $610.7 billion (Federal Reserve Board 2000). Credit cards include bank-issued cards (Visa and MasterCard), general purpose cards (Discover and American Express Blue), store cards issued by specific retailers (Sears, J.C. Penney, etc.), travel-and-entertainment cards (American Express, Diners Club), and secured cards (credit cards that require a security deposit). While bankcards are today's dominant form of credit card, the first credit cards were store cards introduced in the early 1900s (Mandell 1990). There are 170 million active store card accounts in the United States (Spurgin 1998). According to the 1998 Survey of Consumer Finances, 68% of American families have bankcards, and half of families have store cards (Durkin 2000). In addition, 19% of U.S. households carry a balance on store cards, while 37% carry a balance on bankcards. Like bankcards, store cards serve two distinct purposes for consumers: a payment instrument and a financing source (Ausubel 1991; Chakravorti 1997, 2000; Chakravorti and Emmons 2001; Lee and Hogarth 1999; Slocum and Matthews 1970; Stavins 2000). Consumers use store cards as a substitute for cash, checks, and bankcards when making purchases and as a source of revolving credit (Courtless 1993; Heck 1987; Hirschman 1981; Yeo 1990). However, there exist some differences between store cards and bankcards. First, store cards can be used only at locations affiliated with the issuer of the cards (Humphrey 2001). Second, store cards often provide credit for consumers with little creditworthiness and additional credit to consumers with only limited credit availability, allowing consumers to extend their credit perhaps beyond their ability to repay (Starvins 2000). The additional credit line created by store cards can harm consumers. Retailers use store card programs to increase sales, and retail sales typically increase after a retailer adopts its own credit cards (Chakravorti 2000). The availability of credit through store cards, combined with retailers' marketing efforts to facilitate their card use, encourages consumer spending, which can create excessive consumer debt. In general, store cards have higher interest rates than do bankcards (Higgins 1993; Rosen 1994; Staten and Johnson 1995; Simmonds 2000). These circumstances contribute to a store card delinquency rate that is even higher than that of bankcards (Clark 2000; Ring 1997; Zandi 1997). Retailers have also been known to pressure bankrupt consumers to repay store card debt for which they are not legally liable (A Painful Guilty Plea by Sears 1999; Adler 1998; Judge Kenner in Her Own Words 1997). …