Numerous retailers increased interest rates on their store cards prior to the anticipated Fed rate reductions.

• In the months before the Federal Reserve started lowering rates, over 50 major U.S. retailers increased the interest rates on their store credit cards, safeguarding their profit margins.
• Between September 2023 and September 2024, several retailers, including Big Lots, Gap, Petco, Macy's, and Nordstrom, raised the annual percentage rate (APR) on their store cards.
• Bankrate analyst Ted Rossman advised against carrying a balance if offered one of these holiday season.

In the months leading up to the Federal Reserve's rate cuts, numerous large U.S. retailers and their bank partners increased interest rates on their store-branded cards to unprecedented levels, with the aim of boosting profits during a period of weak sales.

Over 50 retailers, including , , , , and , raised the annual percentage rate (APR) on their credit cards between September 2023 and September 2024, according to a Bankrate.com analysis of data from the nation's top 100 retailers.

The largest increase in APR among retailers reviewed by Bankrate was 6 percentage points, raised by Big Lots from 29.99% to 35.99%. Gap followed with a 5 percentage point hike on its Banana Republic, Athleta, Old Navy, and namesake cards. Petco came in third with a 4.5 percentage point increase.

As of September, among the companies tracked by Bankrate, Big Lots, Burlington, Michael's, and Petco have the highest APR at a staggering 35.99%.

"Since the Fed raised interest rates by 5.25% in 2022 and 2023, the threshold for credit cards to charge over 30% has become more common, according to Ted Rossman, Bankrate's senior industry analyst. Prior to this rate hiking cycle, 30% was considered a high threshold that few credit cards dared to cross."

The Fed's rate-cutting cycle in September did not solely cause APRs to increase. Prior to the Fed's rate-cutting cycle, retailers and their bank partners raised interest rates on their store cards to safeguard their profits when the federal funds rate, which determines their own interest rates, decreased.

During the holiday shopping season, the average interest rate on a store card is at an all-time high, with credit card debt and delinquencies reaching new highs and levels not seen since 2011. Rossman advised consumers to exercise caution before signing up for a store card.

"Rossman advised against carrying a balance on holiday credit card offers, stating that it's better to pay it off immediately to receive rewards. However, he cautioned that many people unknowingly sign up for these cards without fully understanding the terms."

Jasmine Matheney, a 35-year-old small business owner in Michigan, received a $5,000 credit card limit when she signed up for her first retail credit card at age 18. She quickly maxed it out, spending the money on expensive gifts for her loved ones and new clothes for herself.

""I defaulted on an account after buying everything without realizing the consequences. It resulted in a whirlwind of problems," Matheney stated in an interview."

As a result of her debt at Nordstrom going into collections, it took Matheney years to rebuild her credit.

"Matheney stated that the record high rates demonstrate your understanding of how their greed affects them. "They lure you in with the promise of saving 40% off, but when you end up carrying a balance, you end up paying more than 40% back.""

Profit padding and hedged bets

Many card issuers preemptively raised their rates instead of seeing their profit fall after planned rate cuts from the Federal Reserve, as most credit cards are indexed to the prime rate, which shifts based on the Federal Reserve's rate.

Typically, retailers and their banking partners split the revenue when a shopper incurs interest or late fees on a branded card.

Before the Federal Reserve cut interest rates for the first time in four years on September 18, all of the retailers reviewed by CNBC increased their rates. The companies raised rates despite the prime rate remaining unchanged and the market being confident that the Fed would ease monetary policy at its September meeting.

The average APR on retail credit cards increased by 1.52 percentage points between September 2023 and September 2024, while the average traditional credit card rate remained unchanged at 0.08 percentage points, indicating that the rapid increase in rates is exclusive to store cards, according to Bankrate data.

The average annual percentage rate (APR) on store cards increased by 2.21 percentage points between November 4, 2022, and September 2023. After the Federal Reserve's 1.5-point increase was implemented during that time, retailers raised rates by an additional 0.71 points. This was less than half of the interest rate increase for store cards seen from September 2023 to September 2024, when the federal funds rate remained unchanged.

The companies that responded to CNBC's inquiry about the increase in APR on their store cards mentioned industry norms and the current economic climate as reasons.

Big Lots collaborates with Comenity Bank to make responsible APR adjustments in accordance with industry standards, with the aim of enabling customers to purchase necessary items without financial strain.

The bank stated that the interest rate increases implemented earlier this year across the financial services sector were caused by several factors, including historical federal rate increases, rising credit losses, and regulatory pressures.

Nordstrom's credit card program offers numerous benefits, and our spokeswoman emphasized our commitment to simplifying our pricing structure.

"The spokeswoman stated that our pricing structure is based on a variable rate model linked to the prime rate. This adjustment allows us to remain competitive in the current economic climate while maintaining alignment with other retail card programs. Although there has been an increase, our rates remain comparable to co-brand cards."

The timing and scope of the interest rate increases on store cards suggest a clearer motive for the changes: profits.

""Rossman from Bankrate stated that store cards are a lucrative business and can also serve as profit-generating centers," said Rossman from Bankrate."

A 2023 report by Citi analyst Paul Lejuez revealed that 49% of Macy's operating profits in 2022 were generated through its credit card program.

This year, Macy's financial performance has improved due to the increase in interest rates.

In May, the company improved its full-year outlook for credit card revenues because of higher profit margins resulting from increased balances in the portfolio, according to finance chief Adrian Mitchell during a call with analysts. In August, Mitchell stated that consumers were keeping credit card balances for a longer period, which led to better-than-expected revenue growth.

Although some retailers, including Macy's, Nordstrom, and TJX, did not pass on the 0.5 percentage point cut implemented by the Federal Reserve in September, their APRs remain at record highs, with an increase of 2 to 2.25 percentage points compared to a year ago.

Retailers are under pressure to generate more revenue from their remaining customers as store cards are no longer as popular as they once were.

In seven out of the past eight years, there has been a decline in new account openings for private label cards, as reported by Equifax. A growing number of shoppers, particularly the younger generation, are choosing buy now, pay later services instead.

Since credit card delinquencies are at their highest levels since 2011, it makes sense that interest rates are increasing on cards that are typically pretty easy to get. However, as of the end of July, only 14% of private label cards were issued to consumers with subprime credit. Additionally, more than half of new accounts belonged to people with credit scores over 700, according to an October Equifax report.

Even customers with strong credit scores were charged higher interest rates by retailers.

Robin, a 59-year-old public relations professional in Southern California, expressed surprise and disappointment over Macy's decision to increase its APR, despite her consistent on-time payments and habit of paying more than the minimum amount.

"My credit score of 744 means I'm not a default risk, but it makes me less interested in shopping at Macy's because of their high loan shark rates."

— Additional reporting by CNBC's Stephanie Landsman.