Shoppers warned over using expensive store cards
Consumers are being warned to tread carefully when using retailers' store cards, after a leading comparison website found that shoppers are regularly charged as much as 29.9% APR when using the cards to pay for purchases.
Moneysupermarket.com found that people buying £500 worth of shopping using a Burtons or Dorothy Perkins store card at 29.9% APR will incur interest of £141.07 in a single year if they only pay off the minimum amount each month.
The website also warned shoppers to look beyond initial promotions when choosing a card in order to avoid falling into "store and credit card traps".
Kevin Mountford, head of banking at MoneySupermarket.com, said: "It is easy to see why it can be tempting to open a store card, as the introductory offers that come with these can really help you save on the day of purchase. However, shoppers should be wary of the high interest rates that come with store cards, which will negate the advantages if the balance is not repaid in full."
But Mountford added that some retailer's own credit cards tend to have lower APRs than their store cards, and some offer interest-free periods and rewards for purchases.
The Marks & Spencer credit card, for example, has a representative APR of 16.9% although purchases are interest free for the first 15 months. Cardholders also receive on-going rewards no matter where they shop – shoppers receive 1 point for every £1 spent at M&S, and 1 point for every £2 spent elsewhere. Every 100 points earned is worth £1 in Marks & Spencer vouchers.
The good cards
Not all store cards came out bad from the research. The New Look Store Card was praised for offering customers 20% off their first purchase; while the Homebase Store Card will give you £60 worth of vouchers straight away. But consumers must be able to afford to pay off the full amount at the end of the period in order to avoid the excessive APRs.
"Before signing up for a new card think about how you will use it, as many credit card deals will bring better longer-term benefits than store cards," adds Mountford. "For example, a credit card is a better option for those who want to spread the cost of a big purchase, as you can take advantage of one of the deals offering an interest-free period on purchases.
"In addition to these promotional offers, many of these cards also offer on-going rewards, which can help make your money go further. However these cards should also be used responsibly: Shoppers need to ensure they pay their balance off before the interest-free period ends, and that they aren't late making a repayment so as to avoid being hit with a late fee."
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.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.