Are you being tricked into sky-high interest?
Have you ever felt pressured into taking out a store card, only to find the high interest rates by far outweigh the initial rewards? Well you’re not alone.
This is according to research launched by the department for Business Innovation and Skills (BIS) last year called a ‘Call for Evidence’ to discover people’s views on consumer credit and lending practices in the UK.
‘The evidence suggested that while many consumers use store cards to their advantage, some are distracted from the longer term financial implications … by the discount offered or sales assistants’ approaches,’ said a statement from government ministers Edward Davey and Mark Hoban.
They went on to say they were particularly concerned with the use of incentives, such as discounts, which encourage people to make snap decisions and sign up for store cards.
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Cooling-off period
The government announced last year that it believes consumers would benefit from having more time to consider whether a store card is the right option for them.
This so-called ‘cooling-off period’ would see customers prohibited from using a store card for the first seven days after they have signed up for the deal.
It is designed to prevent people from being blinded by on-the-spot offers, such as ‘10% off purchases today if you sign up for a store card’ and give them time to read over the terms and conditions properly.
Many individuals, businesses and consumer groups that responded to the Call for Evidence said they were in support of this proposed measure.
They felt a cooling-off period would give people the opportunity to think about whether other forms of credit were better suited to their requirements or even whether they needed credit at all.
However, others were worried that the cooling-off period would force those who need emergency credit for essential items to seek credit from illegal lenders, pushing them into overwhelming levels of debt.
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Sky-high interest rates
While store cards can seem highly tempting when you’re at the till point, being offered an immediate discount, they can cause people to rack up huge amounts of debt if the balances aren’t paid off within the interest-free period.
You could find yourself faced with a far higher interest rate than that attached to similar products - on average, the interest rate on store cards is 28%, compared with 18% on credit cards, according to the BIS.
Online catalogue Very’s store card comes with a hefty 39.7% APR Representative and a typical credit limit of £1,000. Basically, this means you’ll have to pay £397 if you reach the limit.
Argos, Homebase, Dorothy Perkins and men’s fashion retailer Burton all have store cards with an APR Representative of 29.9%.
Savvy shoppers who take advantage of the discount offered and then make sure they pay off their balances in full at the end of the month can benefit from store cards, but if you’re not very good at making payments on time you may want to avoid the products.
Deciding where to go for your bank account, loan or savings account can be a tricky business, especially as there’s so much complicated jargon involved.
What are my alternatives?
If you need to buy things using credit, seeking out a credit card with a lengthy 0% on purchases period is a good alternative as it gives you plenty of time to pay off what you owe, without being stung by sky-high interest rates.
One good example is the Tesco Clubcard Credit Card, which comes with 0% on purchases for 15 months and an APR Representative of 16.9%. This card also comes with a number of benefits, such as earning twice as many points on fuel purchases compared with the ordinary Clubcard if you use the card at a Tesco filling station.
If you’ve built up debt on an existing credit card, you could consider a card with a competitive balance transfer period. At present, Barclaycard offers the longest ever 0% period at a massive two years. Should you be accepted this month, you would have until July 2013 to clear your debt.
Borrowers who require a shorter 0% term could opt for the Virgin Credit Card, which carries 18 months interest free and offers discounts such as 10% off on Virgin Holidays.
With any 0% credit card deal, try to ensure you clear the balance in full before the introductory offer expires or you will start to pay expensive interest and potentially work up a debt again.
Rather than looking for store card discounts, you could be better off with a credit card that offers rewards or cashback. Both American Express and Capital One allow you to earn up to £100 cashback in the first three months and up to 1.25% thereafter. Alternatively, the MBNA American Express Credit Card pays 1.5% on supermarket and fuel purchases and 0.75% elsewhere.
Whenever you use a credit card to earn rewards, it would be wise to clear your balance each month or your interest payments could soon outweigh any rewards you’ve earned.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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