Beware the store cards that punish you for not spending
When it comes to debt, store cards are notoriously bad. With rates of between 25% and 30% APR - compared with the average credit card rate of 16.9% - using your store card regularly and not clearing the balance each month could cost you dearly.
But it's about to get worse. Santander, the biggest store card issuer in the UK, has decided to penalise customers who don't use their card for six months or more by introducing a dormancy fee of £10 - which means they are penalising people who use their cards sensibly.
For more read: Why is Santander's service so poor?
"Dormancy fees are probably a reaction by card providers to a trend where consumers take out a card to make one discounted purchase, repay in full on their first statement and never use the card again," says Andrew Hagger, spokesperson for price comparison website moneynet.co.uk.
"If it's made clear when the card is taken out, then it's fair enough, but I'm not sure that's always the case. "
However, Susan Hannums, a spokesperson for Santander, says it would notify cardholders before making any charge. "We would always write to customers first offering them three options," she says. "We'd remind them of the card they hold and tell them that if they use the card within the next 30 days no dormancy fee will be applied.
"Alternatively, they can choose to keep the card, for the loyalty benefits, but not use it and accept the charge. Or finally, they may wish to close the account and no charge will be applied."
However, many store card holders are unaware of which company issues which cards. So if you receive an unsolicited letter from Santander but have no known dealings with the lender, you might be tempted to disregard it, thinking it's just another sales letter.
Defending the provider's move, Hannums says: "As store cards are not designed as a deposit-taking facility, it's our overriding priority to contact the customer to organise the repayment of any credit balance to them as soon as possible.
"While we make every effort to do this, it can occasionally prove difficult to obtain a response. It's for this reason that we reserve the right to charge a fee, which will never exceed the account balance and is capped at £10."
This is not the only sneaky fee on Santander's store cards, however. Along with the dormancy charge, several of the lender's store cards, including the Debenhams store card, penalise customers who have a balance on their cards for three consecutive months.
This is on top of the massive amount of interest they pay on the balance. Plus there already exists a standard £12 penalty for missing payments.
While charges like these are common on most store cards, Santander is currently the only provider to charge a dormancy fee.
Other store card issuers such as M&S Money (M&S, Home Retail Group, Argos); Ikano (Coast, Ikea, Jaeger, Karen Millen, New Look, Oasis, Warehouse and Habitat); and Creation Financial (Allders, Brantano, Joplings, Quiz, Selfridges and USC) all say they have no plans to introduce one.
Understand before signing up
While clearing your store card each month is very much recommended, it may not always be possible. Under these clauses, only a customer who regularly uses their card but always clears the balance each month can be assured of no extra charges.
"Before signing up to a store card, make sure you understand all the costs and charges involved. Ask yourself if you can really afford it," recommends Citizens Advice spokesperson Laura Burnell.
Dormancy fees: are you affected?
Santander issues store cards for the following high street shops:
House of Frasier
Russell & Bromley
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%.