Beware 'extortionate' Argos, Burton and Miss Selfridge store cards
Store cards have been criticised for charging consumers "extortionate" interest rates, with Argos, Burton and Miss Selfridge named and shamed as the worst offenders.
At 29.9% APR, the three cards are almost five times more expensive than leading credit cards. Next charges 24.99% APR, making it around four times as costly.
By comparison, Lloyds Bank, Bank of Scotland and Halifax all offer credit cards with a 6.4% APR, and they let you spend anywhere, rather than just with the issuing retailer.
The high interest rates charged by store cards can significantly inflate the purchase price.
For example, someone repaying the minimum balance on a store card for a £450 washing machine at 29.9% APR, would end up paying £43.87 a month, or £526.40 in total. That's £76.40 in interest and 17% more than the list price.
Even a more modest purchase, like a £100 winter coat would cost £9.75 a month – based on the same 29.9% APR - or £116.98 in total. Again, this is 17% more than the original selling price.
Worse still, only make the minimum payments and you'll see the purchase price soar. The washing machines would end up costing £1,138.34 and take more than 12 years to clear the balance, according to estimates from Moneyfacts.
Moneyfacts' personal finance expert Rachel Springall says: "Store cards are a complete scandal for customers if they don't pay off the balance as soon as they have made their purchase, because these cards charge extortionate interest rates compared with other reasonable credit cards on the market.
"Shoppers are likely to be persuaded at the till to take out a store card … 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."
Since 2011 retailers have been banned from paying commission to staff for getting customers to open store cards and from offering shoppers an instant discounts as an incentive to take out a card. Shops can only apply a discount on an account after a seven-day period.
However, many retailers still off staff a range of 'benefits' linked to store card account openings but insist jobs are dependent on store card sales.
Most store cards, like credit cards, don't charge interest if you clear the balance in full each month, so careful users can still save money with them because of the discounts offered.
A spokesperson for Argos told Moneywise, “Our store cards provide an easy way for customers to choose to spread the cost of their purchases. Customers can take advantage of our Buy Now Pay Later plans when using the card allowing them to an interest- and payment-free period of up to six months.
"The vast majority of purchases using the Card are made taking advantage of our buy now pay later plans, and the great majority of our customers choose to pay off their balance in full at the end of the plan and therefore pay no interest. Our customers tend to use the store cards for short-term borrowing to allow them to spread the cost of their purchases.”
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%.