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Target Unwisely Returns to the Store-Only Credit Card

New Target (TGT) customers may think they're caught in a time warp if they apply for a credit card. The discount retailer said today it will stop issuing Target Visa cards and will instead exclusively offer Target store cards, good only for purchases made at company stores and on With this move, Target takes a step back into the past and makes its charge-card program less consumer-friendly and flexible.

Over the years, the era of store charge cards has waned, replaced by rewards-program Visa or MasterCard partnerships offering cards that are good most anywhere. Most of the major department store chains, including Bloomingdale's and Nordstrom (JWN), at least offer customers a choice of a store-Visa hybrid or a store-only card. Even Costco (COST) hooked up with a major card company, American Express, in 1999.

Why is Target going against the grain and returning to a store-only card? Two reasons -- to get more sales and reduce its risk.

Target said its studies of customer spending habits showed shoppers with the store-only card bought more from Target than those with the Target Visa. Fair enough, but how much can you buy at Target? From a rewards standpoint it's got to be a big reduction in how many points you can get, which will drive fewer return trips to Target to cash in points. The store-only card may have made customers buy more in the short run, but it's not clear it'll translate into more sales in the long run.

The other reason for the switch is to stem credit-card losses, which have mounted since the economy went down. A look at Target's year-end financials shows the company has had to shovel more than $1 billion into a doubtful-accounts reserve to help protect its earnings from sudden dips due to card losses, which were $500 million in '08 and $284 million in '09.

Target is one of the few big retailers that still carries its own credit-card receivables, and had a whopping $7 billion in outstanding charges owed as of February. Switching to store-only cards will shrink the charge volumes, and in turn shrink the administrative costs and Target's exposure to nonpayers.

If that's the big problem, Target could solve it by simply spinning off the receivables to a financial-services company, like most major retailers did long ago. That would remove a possible profit vehicle but also end Target's credit-card loss risk. The solution Target came up with is a customer turnoff, and means Target will be passing on many opportunities to flash its logo in front of customers' eyes when they charge goods elsewhere -- a great form of free marketing.

The company has said it'll keep servicing existing Target Visa cards and even renew them when they expire, so it's just new customers who get the short end, which seems unfair. In essence, Target has created two classes of customers, which is a recipe for customer unhappiness.

Photo via Flickr user La Nicoya

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