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E-tailers now offer instant online credit for pricey impulse items

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 credit cards.

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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 fellow shoppers.

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 Group.

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 anyway.

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.

Bringing purchasing power home
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 and Hearts on Fire Co. sell jewelry. GetPlugged.com, Gateway, Etronics and Alienware 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 are high.

"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."


-- Posted: Nov. 10, 2000




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