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Senator finds credit cards cheaper than layaway fees

By , CardRatings contributor
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The lawmaker now famous for clarifying language on credit card applications lashed out this month against retailers' holiday layaway programs. According to the Associated Press, New York senator Chuck Schumer warned consumers that service fees for layaway programs can cost consumers more than the typical finance charges on retail credit cards.

AP's Michael Gormley reported that Schumer raised concerns about one retailer's $5 layaway fee and 10 percent down payment requirement. For a $25 toy paid off over a month, the initial $7.50 paid to a retailer amounts to more than the interest charges accrued on a credit card charging an annual percentage rate over 100 percent. Schumer suggested that he would seek a formal inquiry into layaway fees from the Federal Trade Commission if the retail industry doesn't better explain its pricing.

According to the National Retail Federation, layaway programs regained popularity during the 2008 financial crisis as an easy way for holiday shoppers to secure hot products without using credit cards. In an official blog post, NRF spokeswoman Kathy Grannis wrote that layaway programs offer other benefits for consumers, such as providing a secure place for parents to store holiday gifts outside the home. Grannis added that Toys "R" Us, Best Buy, and Walmart planned to heavily promote their layaway options this year, alongside the already successful programs offered by Sears and Kmart.

Retailers rely on credit cards and layaway for holiday shopping deals

Many prominent national retailers have relaunched layaway programs to complement their already strong affinity credit card programs. According to analysts at Fitch Ratings, retail credit cards continued to grow during the third quarter of 2011. In a statement to reporters, Fitch Ratings senior director Cynthia Ullrich said that retail store credit cards performed well during the recession, thanks to strong marketing tie-ins that included advance notice of exclusive sales and other special discounts.

Fitch Ratings also reported that retail credit cards typically come with lower credit limits than bank-issued Visa or MasterCard accounts, making them far less risky to issuers. Even though the reduced danger of delinquency enables retailers to sponsor credit cards for limited credit, layaway programs reach consumers who can't qualify for new accounts or who would rather pay in cash for their holiday purchases.

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