The store card time bomb
It was back in 1977 when I first encountered something akin to the present day store card. My brother was getting married and, as best man, I needed a suit.
So off I trundled to Burtons and got my first ever suit. It was expensive, but the store said I could pay just £3 per month. I was only 20 and didn’t really understand the implication of what I had signed up to. In fact, at £3 per month, it would have taken me around five years to pay for just one suit.
Now, 33 years later, there are 11 million store cards in operation in the UK with outstanding balances around £2 billion.
Store cards are similar to credit cards, except that you can only use them in the specific store (or the group of stores) that issued it. While using them may entitle you to special discounts, interest rates tend to be much higher than for a typical credit card.
If used correctly – i.e. clearing the balance each time the bill comes in – store cards are a good way to save money off purchases.
You can get as much as a 20% discount off the day’s purchase, usually on the day you open the account.
If you apply for a store card, you could save more money by asking your family and friends if they need anything else as well. You then make the first big purchase on behalf of everyone, get the discount and then pay off the balance.
Next time, someone else from the group signs up and buys on behalf of you all. And so on and so forth.
Many store cards have special store cardholder evenings with special offers - a bit like an exclusive membership club. Some stores will even gift wrap the items you purchase.
However, many people don’t use store cards in the right way and end up paying heavily as a result.
Store cards are not cheap and it is not uncommon for some to attract interest rates above 25%.
Meanwhile, some experts claim that applying for a store card can have an adverse affect on your credit rating – which could make it hard for you to get credit, such as a mortgage, in the future.
Finally, is it right that we can be sold ‘credit’ over the counter by a shop assistant? Are they fully qualified to talk about offering credit?
My concern, which is echoed by the insolvency trade body R3, is that financially unqualified shop staff should be banned from selling commission-driven store cards.
This type of credit can have a devastating impact on consumers as it lures them with discounts and can potentially leave them with mounting and uncontrollable debt.
The next time you are offered a store card while making a purchase, ask: “Are you qualified to offer me credit and do you understand the repercussions if I was unable to clear the balance every month?”
You can expect some annoyed and evasive answers as you will be seen as a threat to their commission.
Perhaps now is the time to rebrand the store card. Maybe it should be called ‘in store debt card’ - not such a good marketing name I suppose, which why is I am just a debt counsellor rather than in public relations.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.