Off Target

Every screen on Target's wall of televisions flickers with ads for the store's credit card.

Every checkout line has a stack of credit application flyers, below printouts boasting totals of cardholders' automatic charitable contributions: $15,287 to Santa Fe High School from 81 Target cardholders; $5,511.24 to Agua Fria Elementary School.

And so on.

At one register, on March 29, a cashier recites the script. "Would you like to open a Target REDcard? It's a Visa credit card," she says.

The middle-aged woman across the counter politely declines. Her companion, resting his hands on the red shopping cart, scoffs, "Just what we need: another credit card."

The cashier seems sympathetic. "A lot of people feel that way," she says.

The woman apologizes. "We're really trying to avoid that," she explains.

The cashier drops the pitch. "At least you're wise enough to know that it's not really cheaper if you're paying interest," she says.

As the register spits out a receipt, the digital screen makes a final plea: Use your REDcard; help the schools.

Granted, Santa Fe schools could use some help. But that's not why Target is so aggressively hawking its credit cards. In this economy, Walmart's trendier twin has gotten as desperate to keep people in debt as its customers are to climb out of it.

The scene in this Target store might foreshadow a consumer credit crash along the lines of the recent mortgage collapse. As Target goes, so goes the suburban middle class. And the company's stock has fallen.

Target has 1,682 stores around the country. Nine of those, with 10,024 square feet of retail space between them, are in New Mexico.

When the City of Santa Fe kicked off a buy local campaign last month, organizers counted chain stores like Target as "local." Naturally, that decision led to some grumbling. The grumblers have a point.

What sets Target apart from locally owned stores is not just the discount prices and expansive floor space. The owner of a local shop won't likely extend credit to someone who won't pay him back. Target, however, makes money by pushing credit on pretty much anyone who passes through the checkout line.

This free-and-easy consumer experience is part of the reason why Target has one of the busiest parking lots in Santa Fe. But even some company bigwigs realize the model doesn't work over the long term.
Two years ago, a major Target shareholder, the hedge fund magnate William Ackman, pushed for the retailer to sell off its credit segment. Ackman now seems prescient.

Last year, Target wrote off more than twice as many bad credit card debts as the year before. It's as if the company doesn't care if it gets paid back.

From 2005 through 2007, Target took legal action against 34 bad debtors from Santa Fe County, according to filings at the First Judicial District Court.

That number may sound inconsequential next to the wave of home foreclosures, but it is rising. Last year alone, Target pursued 36 such actions. This year, so far, is on track to be another bust, with Target taking seven local bad debts to court already.

Those cases were handled for Target in form letters signed by James Grubel and Darren Tallman, of Farrell & Seldin in Albuquerque, a law firm "dedicated to creditors' rights." Grubel did not return SFR's call.
SFR also had little luck tracking down recent local Target debtors. The few with listed phone numbers did not return messages. Nevertheless, they seem to comprise a cross section of Santa Fe.

  •  A woman in Lamy ran up $16,616 on her Target card.
  •  A Santa Fe woman who runs a small investment company owes Target $12,000, plus interest.
  •  The home of a man who owes Target $6,980 is now listed as for rent.

Were these people buying plasma TVs or food?

"My guess is you'll find some of both," Andrea Slatopolsky, who runs financial literacy classes for the nonprofit group Homewise, says. "There's irresponsibility on both sides. Meaning, the credit card industry that's handed out tons and tons of credit, and people getting themselves into trouble living beyond their means."

Like Homewise, The Housing Trust advises people to avoid high-interest store credit cards.

"They're nearly impossible for people to pay off," Daniel Werwath, a Housing Trust resources development manager, says.

Werwath isn't surprised Target makes money from its cards despite high default rates. "The people that are paying are paying forever. They're in this hamster wheel situation," he says. "It's the same thing with all these bad mortgages. They were assuming 20, 30, 40 percent default rates on some of the more aggressive loans. Target, too, is in legitimate risk right now."

Target sold $62.9 billion worth of stuff last year, on top of more than $2 billion in credit card revenues. But people are buying less, and the bad debts are piling up.

More than 60 percent of Target's credit card revenues were countered by "bad debt expense"—to the tune of $1.3 billion last year.

Those bad debts are getting way, way badder. In 2007, bad debt was only 25 percent of its credit card revenues.

Target still made a $155 million profit on the credit side. But if things keep going the way they are, offering easy credit will no longer be a means to easy money.

As of Jan. 31, Target had $393 million in credit accounts that were 90 days past due. At the end of this month, the company will have to write off any accounts that remain past due as bad debts.

The management wants people to think they've got everything under control. In its last annual filing with the US Securities and Exchange Commission, Target claims "the allowance for doubtful accounts is adequate to cover anticipated losses"—wait for it—"under current conditions."

Obviously, current conditions could get worse. Especially as the store pushes new credit cards to cover old losses.

"We've been very clear that we've tightened all aspects of our underwriting," Target spokesman Eric Hausman says. "Just because you're offered a card doesn't mean you're going to be approved."

That may be. But in much the same way that taxpayers rescued subprime mortgage lenders, they may be asked to account for the consumer loans on which Target cannot collect.

Consider: Last year, Target sold a 47 percent stake in its credit card business to JPMorgan Chase & Co., one of the few financial giants to survive 2008.

It survived only with government aid. The Bush administration gave JPMorgan a $25 billion loan under the Troubled Asset Relief Program.

And where did the US government find that $25 billion? From taxpayers, of course—but also from foreign creditors.

Fittingly, perhaps, the debt cycle ends where so much of Target's merchandise is made: China.

China, this country's largest creditor, holds approximately $1 trillion in US government debt. That's the same debt the government used to bail out JPMorgan, which temporarily saved Target's failing credit card business.

On the bright side, a sign on the door says the Santa Fe Target is hiring.

Santa Fe Reporter