The store card scandal revealed - Credit cards - News - Moneyfacts


The store card scandal revealed

The store card scandal revealed

Category: Credit cards

Updated: 16/11/2015
First Published: 01/09/2015

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

We've all been there. We take our chosen items to the till, only to be asked if we'd like to open a store card to save X% on our purchases. The question is, are you tempted? Many people are, particularly when faced with an upfront discount – and sometimes longer-term discounts, too – but our research shows that you may want to think twice before signing up.

You could pay for your store card later

The research shows that store cards can be a pricey method of getting upfront discounts, because even though your first purchase may be cheaper at the outset, if you don't pay it off by the deadline, you'll be hit with hefty interest charges. Ultimately, this could end up costing you more: not only could it completely wipe out the benefits of the initial discount, but you could also end up paying more than the item is worth – and it could take you years to pay it off.

Take a look at the table below to get an idea of what we're talking about. Based on a typical interest rate of 29.9% APR – already far higher than other credit cards – it highlights the cost of these cards if they're not paid off in full before interest applies, and that interest can quickly add up.

Store card charging 29.9% - based on a minimum repayment Store card charging 29.9% - based on a minimum repayment Interest after 1 month* Time it takes to pay off Total interest applied Total cost of goods and interest
Shoes or clothes £50 £0.99 1 year £5.71 £55.71
Winter coat £100 £2.09 2 years 2 months £29.45 £129.46
Washing machine £450 £9.60 12 years 7 months £688.29 £1,138.34
*Based on a minimum repayment of £5, or 3.2%, assuming no other portion of the balance is cleared

As you can see, even a simple £100 purchase could take over two years to pay off if you only make the minimum payment each month, while for an electrical item you could end up paying over double its initial value before it's all repaid.

"Store cards are a complete scandal for customers if they don't pay off the balance as soon as they have made their purchase," said Rachel Springall, finance expert at Moneyfacts. "This is because these cards charge extortionate interest rates compared with other reasonable credit cards on the market, with the majority of store cards charging around 29.9% APR.

"Shoppers are likely to be persuaded at the till to take out a store card, most likely to get a discount on the goods they have purchased, but they should never assume that they are getting a good deal. For example, the lowest interest rate they could achieve on a normal credit card is just 6.4% APR – and that's before we even get to cards that charge 0% interest on purchases for a limited period."

Weigh up the costs

It may initially sound like a good way to spread the cost or nab an extra discount on your shopping, but really, store cards don't pay. If you're thinking of taking one out in the run-up to Christmas it's important to weight up the overall cost, and at the very least, don't be swayed by the upfront discount – if you don't take everything else into consideration, it could cost you in the long run.

Remember that store cards are very restrictive, too – as Rachel points out, customers will only be allowed to use cards in specific stores – and when you combine that with the subsequent interest that applies each month, any upfront discounts could be completely wiped out. If you're confident that you'll be able to pay off the balance in full before interest is applied then you may be able to benefit from the discount – after which you'll want to cut up the card and close the account – but there are far better ways to go about it.

"If customers know they can definitely pay off the balance, they could aim to get a larger discount on a bigger spend for extra savings," added Rachel. "Using a cashback card for purchases is a wiser option for consecutive spending, particularly for more pricey goods, but if shoppers want to repay their debt over a longer term, then they should consider an interest-free credit card instead."

It's now possible to get a staggering 26 months of interest-free purchases, giving you plenty of time to clear the balance before interest is applied, so this could be a great choice for those who are genuinely looking for ways to spread the cost. Above all, don't be tempted by the store card discount, but if you simply can't resist, make sure to pay it off! You were going to buy it anyway, right?

Remember, in order to secure a mortgage, credit card or personal loan you need to have a good credit rating. To find out if yours has a clean bill of health, contact a credit check provider, such as Experian CreditExpert to investigate your credit report.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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