Target's credit-card users find it harder to pay up

The economic meltdown is making it harder for customers of Target Corp. to pay their credit-card bills, putting the Minneapolis-based retailer's credit-card portfolio in a riskier position as it enters the crucial holiday season.

Target reported Monday that more of its customers who use a Target credit card aren't paying their bills, and the ones that are, are paying less.

Target wrote off 9.86 percent of its $8.7 billion credit-card portfolio in August, according to documents filed with the Securities and Exchange Commission. That's an increase of almost 10 percent from the 9.08 percent charge-off rate just a month earlier and a substantial jump from August 2007, when the charge-off rate was 5.66 percent.

The charge-off rate is now higher than Target forecast as recently as last month, when it said it likely would be between 8 and 9 percent for the year. Earlier in the year it had forecast a charge-off rate of 7 to 8 percent.

Representatives of Target did not return calls for comment Monday. Previously Target has said it will tighten its credit standards going forward, a move that could affect holiday sales.

The dwindling credit picture caused at least one analyst to lower his rating on Target stock. Lazard Capital Markets analyst Todd Slater cut his rating on Target shares to "hold" from "buy."

Target stock drops 6.6 percent

Target stock closed down 6.6 percent at $49.80 Monday.

William Ryan, an analyst at Portales Partners, a New York equity research firm that closely tracks Target's credit-card financials, said he believes the charge-off rate could hit 11 percent to 12 percent within the next six months.

Delinquencies -- considered an indicator of more difficulty down the road -- totaled $627.4 million in August, up nearly 9 percent from July. Target customers also were paying less on their credit-card bills in August, with payment rates -- collections of principal, finance charges and other fees -- slipping to 12.46 percent of receivables, compared with 12.79 percent in July and 15.21 percent in August 2007.

"We believe that delinquencies will continue to rise as consumers are increasingly burdened with a rising cost of living and higher debt levels," said Citigroup Global Markets analyst Deborah Weinswig in a research report Monday.

Analysts said the rise in charge-offs and delinquencies is affecting many retailers, as customers are struggling to pay off credit-card debt while paying higher prices for basics such as food and gasoline.

"We believe many consumers were using the equity in their homes to reduce revolving credit-card debt," said Piper Jaffray analyst Jeffery Klinefelter in a research bulletin Monday. "Now this avenue of 'debt relief' is largely gone." Klinefelter noted that 25 percent of Target's stores are in Arizona, California, Florida and Nevada, where the housing markets have been especially hard hit.

Target sold nearly half of its credit card loans to J.P. Morgan Chase & Co. in May for $3.6 billion, though it maintained control of all aspects of its financial services business.