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Credit card reward boosts Target's bottom line, consumers' loyalty

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Minneapolis-based retailer Target has recently begun offering a 5 percent discount to shoppers who use its REDcard credit card.
Nikki Tundel

Last month Target started offering a 5 percent discount on virtually everything bought at Target with one of the company's REDcard. 

The discount applies to just about everything but prescription drugs and gift cards. 

Mary Diedrich of Maplewood shops at the Roseville Target store at least once a week. And the only credit card she's using is her Target REDcard.

"I think it's wonderful," she said. "I do most of my shopping here, as it is, and the 5 percent makes a difference."

Target hopes the discounts will make a difference in its finances as well. 

The Great Recession revealed that Target, the "cheap chic" retailer, wasn't as well known for cheap prices as its archrival Walmart. Now the REDcard appears to be the flagship in a new effort to change that perception.

Terry Scully, president of Target Financial Services, said shoppers are embracing the program.

"We've seen an immediate increase in the share of sales on REDcard ... and a significant increase in the number of applications for both credit and debit cards," he said.

For the nine months ending in October, Target shoppers put about 5 percent of their purchases on Target REDcards -- nearly $2.4 billion. Based on Target's REDcard sales, a 5 percent discount could add up to $200 million in savings for consumers. 

That may sound like a serious hit to the bottom line, but Scully says the discount program will be profitable because it will draw shoppers more often to Target stores. 

"The incremental sales lift from increased trip frequency by our guests to our stores will offset the very substantial 5 percent rewards cost that we will be bearing," he said.

Targets expects the discount program could boost next year's sales by as much as $1.3 billion.

At the same time, Target hopes the program will mean smaller payments to other card issuers who charge a fee with each purchase. 

The retailer has launched other discounts. Customers who fill five prescriptions get a coupon good for 5 percent off purchases for one day. 

And a program called kickbucks awaits shoppers who register their iPhones with Target. After a certain number of store visits, they can receive electronic discount coupons and credits toward gift cards. 

Retail analyst Matt Arnold says the REDcard program should help convince consumers they can get a good deal at Target.

"If you're able to take 5 percent off everything, that does a lot to help price perception," he said.

And analysts say when it comes to reward cards, 5 percent is hard to beat, even if it only applies at Target.

David Robertson, publisher of the Nilson Report, which tracks the payment card industry, said Target is tapping into consumers' increasing frugality.

"It's now trying to get out in front again on the new consumer mindset, which is much more parsimonious," he said.

But consumers are also increasingly leery of debt. That may mean people think long and hard about signing up for the REDcard. 

Rachel Clyne has been using her Discover card at Target, getting 1 percent cash-back payments. And she's been buying groceries at Rainbow Foods to get discount coupons on gasoline.

"The 5 percent makes more sense," she said. "But it's one more card to keep track of. And it's another bill to pay, when I could just do it all on Discover."

But with a family of six and one income, Clyne said she's going to look at the 5 percent discount.