American retailers like Best Buy (BBY) and Macy’s (M) warn that shoppers are losing their ability to pay down their credit cards. They’re worried this trend could worsen as we head into the all-important holiday season.

“We are seeing a more normalized rate compared to 2020,” said Matt Bilunas, Best Buy’s CFO, referring to the sharp rise in interest rates affecting credit cards.

Credit card spending has been on a long-term uptrend since the dawn of this century.

During the pandemic, consumers took a breather and revolving credit declined by more than $120 billion. Eventually, spending recovered—mainly because consumers took out new cards to pay down existing balances.

Fast forward to 2023, credit cards are once again flashing warning sings. But retailers can’t blame it on the pandemic this time.

Credit card rates are through the roof

Today, rising interest rates and high inflation are the main culprits retailers are seeing for the decline in credit card usage. All while American credit card balances reached a record $1 trillion last quarter.

And the average credit card interest rate is now 24.37%, up from 24.24% last month.

“While we have seen an increase in revenues as interest rates have risen, that has been more than offset by higher bad debt assumptions and write-offs,” said Adrian Mitchell, Macy’s CFO.

A write-off is when a credit card company closes a customer’s account because they failed to make payments. Macy’s says write-offs have risen because more people are falling behind on their mandatory payments.

The company’s second-quarter earnings report highlighted a 36% decrease in card purchases from $150 million the year prior due to customers carrying large balances on its store-branded Citibank credit card.

“We continue to see uncertainty in the macroeconomic environment,” said Jeff Gennette, Macy’s CEO, referring to the sharp rise in interest rates.

It’s not just retailers that are seeing delinquencies from their customers. The percentage of delinquent payers as a whole rose by 23.1% to 38.2% between the second quarters of 2022 and 2023.

“For stressed consumers, store cards are one of the first things they may be late or renege on before regular credit cards, car payments, and mortgages which they consider more important,” said Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors.

The store-branded card

Retailers use credit cards to entice customers to shop more at their stores—typically offering reward points and deeper discounts for purchases made on store-branded cards.

Department stores like Macy’s rely on branded cards for a bulk of their sales. In 2018, 39% of the company’s $1.9 billion in profit came from its Macy’s-branded card, which now carries an APR of 31.99%.

Co-branded credit cards—those jointly offered by a retailer and a bank—have 73.7 million active consumers. These shoppers offer a steady stream of loyal customers and an opportunity to collect large fees on interest rates.

The average store credit card charges an APR of 26.72%, with some going as high as 30%.

“The credit card industry has long seen 30% as an unofficial ceiling that issuers wouldn’t crack for fear of scaring off potential applicants,” said Matt Schulz, chief credit analyst at Lending Tree (TREE).

“The big megabanks that dominate the credit card business just haven’t gone there. That’s slowly starting to change.”

If interest rates keep climbing, consumers can expect to see more credit card rates top 30%. If that happens, card usage could decline further as fees and inflation deter customers from splurging on store cards.