• At least 50 of the largest U.S. retailers boosted interest rates on their store credit cards in the months before the Federal Reserve began cutting rates, in moves that protected their profit margins.
• Big Lots, Gap, Petco, Macy's and Nordstrom are among those that increased the APRs on their store cards between September 2023 and September 2024.
• "If you get offered one of these this holiday season, really take a breath. I would just say 'no' if you're going to carry a balance," said Bankrate analyst Ted Rossman.

Dozens of the largest U.S. retailers and their bank partners jacked up interest rates on their store-branded cards to record highs in the months before the Federal Reserve began cutting rates, as the companies looked to pad profits during a stretch of sluggish sales.

At least 50 companies — including Big Lots, Gap, Petco, Burlington, Macy's and TJX Companies — increased the APRs on their credit cards between September 2023 and September 2024, according to a review of data gathered by Bankrate.com that examined the nation's 100 largest retailers. 

Bankrupt home goods chain Big Lots raised its APR by 6 percentage points from 29.99% to 35.99% — the largest increase out of the retailers reviewed by Bankrate. Gap made the second largest increase, 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. 

Big Lots, Academy Sports, Burlington, Michael's and Petco are tied for having the highest APR among the companies Bankrate tracked, at a staggering 35.99% as of September. 

"Up until this rate hiking cycle that we saw from the Fed in 2022 and 2023, 30% was a threshold that few credit cards dared to cross," Ted Rossman, Bankrate's senior industry analyst, told CNBC. "But they've gone from high to higher these past few years because the Fed pushed rates higher by five and a quarter points and all of a sudden, 29.99% was not the high end anymore. Now we see it's very common for these store cards to charge over 30%."

However, it's not just monetary policy pushing APRs higher. Just before the Fed began its rate-cutting cycle in September, many retailers and their bank partners raised interest rates on their store cards to protect their profits when the federal funds rate — which determines their own interest rates — came down.

Now, the average interest rate on a store card is at an all-time high just ahead of the holiday shopping season, which is when most consumers sign up for store cards. As credit card debt reaches new highs and delinquencies hit levels not seen since 2011, Rossman warned consumers to think twice before signing up.

"If you get offered one of these this holiday season, really take a breath. I would just say no if you're going to carry a balance," said Rossman. "If you pay it off right away and you get the rewards, well, then, that works for you. But we hear many times people sign up for these cards and they don't even realize what they're getting into." 

That's what happened to Jasmine Matheney, a 35-year-old small business owner in Michigan, when she signed up for her first retail credit card at Nordstrom just before Christmas when she was 18. She was given a $5,000 limit and soon maxed it out, splurging on flashy gifts for her loved ones and new clothes for herself. 

"I went crazy. I bought everything. I had no idea, like, oh, you got to pay this back, honey, and it's gonna charge you some fees. So ultimately, I end up defaulting on that account," Matheney recalled in an interview. "It caused me a whirlwind of problems." 

Matheney's debt at Nordstrom ended up going into collections, and it took her years to rebuild her credit as a result. 

"It goes to show you know how their greed is affecting them," Matheney said of the record high rates. "They reel you in, and they say you can save 40% off by getting this card, and then what happens when you do end up carrying a balance? Well, you've just paid that 40% back and then some." 

Profit padding and hedged bets

Most credit cards are indexed to the prime rate, which shifts based on the Federal Reserve's rate. Generally, if the central bank's federal funds rate decreases, so does the amount of interest a retailer's bank partner can charge customers. Rather than see that profit fall after planned rate cuts from the Federal Reserve, many card issuers preemptively raised their rates instead. 

Typically, the retailers and their banking partners share the revenue when a shopper pays interest or a late fee on a branded card.

All of the retailers reviewed by CNBC increased their rates before the Federal Reserve enacted its first interest rate cut in four years on Sept. 18. The companies hiked rates at a time when the prime rate didn't change and the market was increasingly certain that the Fed would begin easing monetary policy at its September meeting. 

On average, the APRs on retail credit cards rose by 1.52 percentage points between September 2023 and September 2024, while the average traditional credit card rate increased by 0.08 percentage points — indicating the rapid increase in rates is unique to store cards, Bankrate data show.

Further, the average APR on a store card grew by 2.21 percentage points between Nov. 4, 2022, and September 2023. When the Fed's 1.5-point increase implemented during that time is subtracted, retailers raised rates by an additional 0.71 points. That was less than half of the interest rate increase for store cards seen from September 2023 to September 2024, when the federal funds rate didn't budge. 

When asked why they increased the APR on their store cards, the companies that returned CNBC's request for comment pointed vaguely to industry standards and the current economic environment. 

"We work closely with our banking partner, Comenity Bank, to ensure APR adjustments are made responsibly and in line with overall industry standards. Our goal remains to empower our customers to purchase what they need and pay over time, ensuring they have access to essential items without financial strain," a spokesperson for Big Lots told CNBC.

The representative referred CNBC to Comenity for further comment. The bank said, "Interest rate increases going into effect previously this year across the financial services industry are due to several factors including historical federal rate increases, rising credit losses and regulatory pressures."

A spokeswoman for Nordstrom pointed to the benefits that come with its credit card program and said "we continually strive to simplify our credit card pricing structure." 

"Our pricing structure follows a variable rate model indexed to the prime rate," the spokeswoman said. "This adjustment ensures that we remain aligned with the current economic environment and continue to offer competitive rates compared to other retail card programs. Despite the increase, our rates remain aligned to similarly situated co-brand cards."

However, the timing and scope of the interest rate increases on store cards indicates a clearer reason for the changes: profits. 

"Store cards are big business," said Bankrate's Rossman. "They can also be profit centers."

He pointed to a 2023 report by Citi analyst Paul Lejuez, who found 49% of Macy's operating profits in 2022 came from its credit card program.

Higher interest rates appear to have boosted Macy's financial performance this year, as well.

In May, the company raised its full-year outlook for credit card revenues "due to better-than-expected profit share resulting from higher balances within the portfolio," finance chief Adrian Mitchell said on a call with analysts. In August, Mitchell said that consumers were keeping credit card balances for longer, which boosted revenue "a little bit better than our expectations." 

Some retailers, such as Macy's, Nordstrom and TJX, have since passed on the 0.5 percentage point cut that the Federal Reserve implemented in September to cardholders. Still, their APRs are at record highs, sitting between 2 and 2.25 percentage points higher than they were a year ago. 

While that may be bad for consumers, it's welcome news on Wall Street. Store cards just aren't as popular as they once were, which means retailers need to make more off the customers they still have.

New account openings for private label cards have fallen in seven of the past eight years, according to Equifax. Many shoppers, especially those who are younger, are opting for services such as buy now, pay later instead. 

Considering that 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. But as of the end of July, only 14% of private label cards were issued to consumers with subprime credit. Further, more than half of new accounts belonged to people with credit scores over 700, according to an October Equifax report. 

Plus, retailers didn't selectively raise interest rates on customers with bad credit. Even those with strong credit scores, such as Macy's customer Brian Robin, were saddled with higher rates. 

"Considering that I've never missed a payment on their card, and I always pay more than the minimum on it, this just absolutely came out of left field, and it was completely unwarranted," Robin, a 59-year-old public relations professional in Southern California, said of Macy's decision to increase its APR.

"My credit score is 744, so it's not like I'm a default risk or anything ... It makes me less interested in shopping at Macy's. I mean, think about it for a second. Why would you want to shop at a place that's charging you loan shark rates?"

— Additional reporting by CNBC's Stephanie Landsman.