E-tailers now offer instant online credit for pricey
Editor's note: In February 2002,
NextCard's parent company, NextBank, was closed by Office of the
Comptroller of the Currency (OCC) and the Federal Deposit Insurance
Corporation (FDIC) was named receiver. The company no longer issues
Go to the checkout counter of a department store,
and chances are that the clerk will ask you to apply for a store
credit card. In just a few minutes you can find out whether you're
worthy of credit.
Now a similar practice has moved to the Internet,
where lines of credit are available with a few online retailers
this holiday season. Your ability to apply for an instant line of
credit gives you two benefits:
- You can buy expensive items if you're approaching
the limits on your credit cards; and
- You risk rejection in the comfort of your
home rather than at the head of a checkout line, sparing you the
humiliation of being turned down for credit in front of snickering
The ability to apply for instant credit with
an online retailer has one big drawback: You can get in over your
head with the click of a mouse button.
"For sure -- we've seen it already -- the easier
it is to get credit, the more defaults you get," says Avivah Litan,
an analyst who follows the electronic payment industry for Gartner
A win-win situation
-- for retailers
The inevitability of defaults represents just a minor subplot
in the broader story of the triumph of materialism with the aid
of its handmaiden, e-commerce. Or, to put it simply, a few defaults
are no big deal because lenders and merchants will make more money
With some of these online retailers, you can
pay for part of your purchase with your credit card and pay the
balance with your line of credit. You can apply for the line of
credit before you begin selecting items, or you can apply after
you've filled your virtual shopping basket and are ready to check
out. It takes anywhere from 30 seconds to five minutes to find out
if you have been extended credit -- and most transactions fall on
the shorter end of that time scale.
You can't get instant credit at just any online
retailer. There's little need for, say, Amazon.com to offer a line
of credit (although the Amazon.com NextCard gives points worth discounts
at the online store). But for high-buckage items -- jewelry, art
and furniture, Shaq-esque home entertainment systems -- a line of
credit is just what the ego ordered.
"Consumers have been able to enjoy this for
a long time in traditional retail channels, so finally the online
offering will be able to match that as well," says Howie Diamond,
vice president of sales for GetPlugged.com,
an online seller of specialty electronics.
Paul Jamieson, an analyst with Gomez.com, says instant
lines of credit spurs shoppers "to purchase goods that they otherwise
couldn't buy at that moment or might not buy. So placing this online
has the same impact -- to drive purchasing power into consumers'
hands to buy online goods, particularly impulse-related purchases."
Only a few online retailers will offer lines
of credit this shopping season, and they sell mostly items that
the ordinary wage slave doesn't buy impulsively. Diamond.com
on Fire Co. sell jewelry. GetPlugged.com, Gateway,
sell electronics. Guild.com
sells furniture and art for the home.
These retailers don't extend credit out of their
own bank accounts. Instead, they provide applications for credit
from outside lenders:
- Gateway and Hearts on Fire link buyers to
eCredit.com, which takes the customer's
financial information and forwards it to various lenders that
decide whether to offer a credit line.
- Diamond.com, Etronics, Alienware and Guild.com
pass the customer's financial information to NextCard, which decides
whether to lend the money and on what terms.
From lender to lender
Hearts on Fire's director of e-commerce, Avner Arazi, explains that
when a consumer applies for a line of credit, eCredit.com forwards
the application to one lender; if that lender rejects it, eCredit
forwards the application to another lender, and then another. As
a result, about 80 percent of applicants are accepted, usually in
less than five minutes. Rates and terms can vary widely.
Previously, customers applied for loans at local
banks and the acceptance rate was around 20 percent, and the decision
took several days.
"The local financial institutions know how to
make a loan in order to finance the purchase of a car or a house,
but they have no idea as far as how to work out the purchase of
a diamond -- $20,000 worth of diamond," Arazi says.
Hearts on Fire cuts diamonds in a distinctive
way designed to sparkle more brilliantly. The company sells jewelry
on its Web site and through brick-and-mortar jewelry stores, and
those real-world retailers can find financing for their customers
via Hearts on Fire's company intranet.
NextCard tailors its rates and terms according
to each applicant's credit history. Credit lines can be up to $10,000.
People with good credit can borrow at 13.99 percent with no fee.
Interest rates for buyers with not-so-sterling credit can approach
30 percent, with account-opening fees of up to $59.
Merchants expect shoppers to adopt online instant
credit this holiday season, even if the interest rates and terms
"You might be shopping and probably don't have
credit or cash to buy what you want, so you might not think twice
about it," Jamieson says. "But now you can consider buying those
things, enjoy them now and pay them off over time."