Steve Willey, Head of Cards
With money tight, it may be tempting to save 10% off a shopping bill and delay paying for your purchases for a while by signing up for a store card. But this often proves to be a costly mistake and can make financial worries worse rather than better.
Interest rates on store cards tend to be significantly higher than those on standard credit cards, so unless you clear your balance in full at the end of the month it can be an expensive way of paying for things.
In May last year, the Competition Commission introduced new regulations governing the administration of store cards which levy annual interest rates in excess of 25%. To neatly dodge the legislation numerous card providers are now hovering just below the threshold - Oasis charges 24.9%, Marks & Spencer 23.9% and Debenhams 19.9%. However, a number of other cards continue to charge interest in excess of 25%.
Burton, Dorothy Perkins, Miss Selfridge and Warehouse all have a rate of 29.9%. If you had a Burton store card with a balance of £500 and only made the minimum repayments of 4% of the outstanding balance (or £4, whichever is greater) each month you'd accrue £120.11 in interest over just one year. Even if you took out a store card with a rate below the 25% threshold and met the minimum repayments each month, such as the Mothercare store card at 19.9%, you'd still quickly accrue interest of £79.73 over the first year on a £500 balance.
According to figures from the Conservative party, British consumers owe £2.2billion on store cards and the number of accounts has nearly doubled from seven million to 13.4million over the last five years. With bills on the up and many households struggling to cope with higher living costs and the impact of the credit crunch, the popularity of store cards seems unlikely to wane, in the short term at least.
However, unless you can afford to repay your balance in full, don't be tempted by the sales spiel at the till.
What are the alternatives?
If you want to use a card for spending, opt for one of the deals offering interest-free periods on purchases. This gives you some breathing space during which time you can pay your debt off. You need to be aware of when the introductory offer ends as you will then start accruing interest on any balance still outstanding - the average rate is currently 16.7%. If you haven't cleared your debt by then you should look to transfer your balance over to another 0% deal.
There are plenty of interest free offers to choose from. The market-leading credit card is the Capital One Platinum, which offers 0% on both balance transfers and purchases until September 1, 2009, before reverting to a typical interest rate of 12.9%. A big advantage of this deal is that the long interest-free period applies to both purchases and balance transfers making it a great option for those who already have outstanding balances on store cards, as well as those who are looking for a card to spend with. However, it is worth noting that you will be charged a 3% fee if you transfer a balance on to the card.
Capital One offers another 0% purchase deal exclusively through moneysupermarket.com - with 0% on purchases and balance transfers until May 1, 2009. This deal has a 3% balance transfer fee but a lower APR of 11.9%.
Alternatively, the Halifax All in One Credit Card offers 0% on purchases and balance transfers for 10 months with a typical APR of 15.9%. Like Capital One, Halifax charges a 3% balance transfer fee.
For those who aren't looking for a card to spend on but who have already fallen into the store card trap and are struggling to pay off existing debts, there are some other good balance transfer deals available. As well as the purchase exclusive, Capital One is also offering an exclusive Balance Transfer deal through moneysupermarket.com. It is interest free until October 1, 2009. The Virgin Credit Card is also worth considering as its 0% offer on balance transfers runs for 15 months. The fee on this card is 2.98%.
It is important not to spend on these cards as well however, as the interest-free periods for purchases last just three months. Therefore, unless you can repay your entire debt within this time you will be charged interest at a typical rate of 15.9% on any purchases you have made after three months.
Are store cards ever a good idea?
Store cards tend to offer a range of benefits designed to entice people to sign up. These include initial discounts, reward points and pre-sales events. If you can afford to pay off your balance each month, a store card may be worth considering to take advantage of such benefits.
If you do not have a favourite store or would prefer a card that offers benefits for all your spending, consider a cashback or reward card. As with store cards, these are only worth considering if you clear your balance each month, otherwise, the interest you will be charged will far outweigh any benefit you receive.
If you want a cashback card, the American Express Platinum for example, offers 5% money back on expenditure up to £4,000 during your first three months and 1.5% thereafter. Again, it has a high typical APR of 18.9% so ensure you can pay the balance in full before taking the card out.
For rewards, the MBNA Platinum Rewards Card is one of the most appealing with one point for every £1 spent and a typical APR of 15.9%. Rewards can be redeemed for things such as high street vouchers, flights and cash.
To compare more cashback cards, rewards cards and 0% purchase deals check out our credit cards section.
Have your say: Have you ever fallen into the store card trap and found it really difficult to clear your debt? Maybe you've got some advice to offer those who are struggling with store card and credit card debts. Visit our forum and let us and other members know your views.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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