Unless you've lived your whole life without going into a shopping mall, you're probably quite familiar with the store credit cards that retailers try to coax you into getting every time you shop. Your clerk may say, "Get 10% off everything you buy today!" -- while whipping out an application and hoping you'll find it worth the effort to fill out.

Of course, the shrinking economy has hurt the retail industry worse than nearly any other part of the market, so the idea that retailers want to do anything they can to encourage you to spend more now shouldn't come as a big shock. Now, though, rising delinquencies and charge-offs on store credit cards are just the latest sign of panic at retail registers -- and it threatens not only the retail companies themselves but also the banks that help customers finance their purchases by issuing the cards.

Are card lenders at cross-purposes with retailers?
Depending on which retailer you're talking about, store credit cards work in two different ways. In some cases, retailers form their own underlying banks that issue the cards, effectively keeping any profits or losses on card transactions within the business. For instance, both Target (NYSE:TGT) and Nordstrom (NYSE:JWN) issue their own cards through bank subsidiaries. Like a bank that retains its own mortgages, these companies have every incentive to make sure they only extend credit to worthy borrowers.

On the other hand, other retailers form partnerships with existing outside banks to issue store credit cards. Citigroup (NYSE:C), for instance, issues store cards for Sears Holdings (NASDAQ:SHLD) and Home Depot (NYSE:HD). With these cards, the retailer doesn't necessarily have the same incentive to ensure good credit -- just as a mortgage-lending bank that just intends to sell the mortgage to an outside entity like Fannie Mae doesn't have as much incentive to check a borrower's credit history vigorously.

Buy now, don't pay later
Store credit cards have their benefits. The biggest is that they've historically been easier to get than traditional cards. But to make up for weaker credit ratings, store card issuers tend to charge higher interest rates than other credit cards. It can take years to pay off such cards if you only make minimum payments, and you'll pay plenty of interest along the way.

Ordinarily, that's enough for card issuers to make up for higher losses. But as of January, losses on store cards exceeded 10.5%, up 44% since last year and higher than they've been since 2005. Delinquencies clocked in at 5.2%. That's significantly higher than the comparable rates for traditional credit cards.

As these cards are becoming less profitable, issuers are seeking to cut their exposure to the business. General Electric (NYSE:GE), which dominates the store card market, tried to sell off its card division but found no buyers. Target sold off part of its loan portfolio to JPMorgan Chase (NYSE:JPM).  

Still, the underlying problem of bad debt exists. That could easily keep getting worse as the recession deepens.

The right way to handle store cards
If you find the great discounts that store cards offer to be just too tempting, there's a simple way to take advantage of them: Simply treat them as coupons. With a regular coupon, you get your one-time discount, giving up your coupon at the register.

You can do something similar with a store credit card. Use it once, get the 10% discount or whatever that retailer offers, and then never use it again. Pay off the full balance at your first opportunity, and then either cancel the card or put it somewhere you'll never use it. If you do that, you'll never get burned.

Unfortunately, that's exactly what you don't want to see happen if you're an investor in retailers or issuing banks. But when times are tough, your first priority as a consumer has to be to take care of your own money -- and let the shareholders take care of themselves.

For more on the ailing economy, read about:

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Fool contributor Dan Caplinger has never owned a store credit card, but he does own shares of General Electric. JPMorgan Chase is a Motley Fool Income Investor selection. Sears Holdings and Home Depot are Motley Fool Inside Value recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy costs nothing and even includes free delivery.