Where once the choice of credit card in the UK was extremely limited, now there is a plethora of companies bombarding everyone with promises of low interest rates, balance transfers and cards which are a status symbol for the holder. In addition to this, most of the High Street stores now offer their own store cards, giving you credit to spend in their store or a chain of stores only.
When you reach the checkout at a clothes store, for example, you are offered a reduction on your purchases if you take out their store card at that point. This makes it extremely easy to say yes and many people agree so that they get the discount without checking any of the small print or terms and conditions. The danger of this is that these cards have notoriously high interest rates of up to 29.9% and for many this is the start of the decline into debt.
Credit cards and store cards work in much the same way and some credit cards have interest rates as high as the store cards, However, if you have a balance on your credit card and cannot afford to pay it off in full, there are ways to use them to your advantage. Many card suppliers offer interest free periods for balance transfers. This will allow you to transfer your existing balance on to another card and pay off as much as you can afford for a set period, often six months, without paying interest on it. This can give you a real opportunity to reduce your debt.
If you have substantial debts on credit and store cards and as a result can only afford to pay the minimum payment on each you may well find that for some of them the monthly interest is actually greater than the amount you are paying and so your balances may actually increase. This is a scary situation to be in as there often seems no way out. In these cases it is often worth trying to take out a personal loan to consolidate all your debt. This will have a significantly lower interest rate than many of the cards and will also reduce the minimum amount you have to pay each month.
The offer of a store card for your favourite store can be tempting and may offer opening discounts, invitations to special events (encouraging you to spend money in the store, of course) and the familiar "If you take out the card today, you'll get 10% off your purchases. It won't take very long; we can fill the form in now. You may as well take advantage of the offer and get your discount at least." You know how it goes and yes, there are some things you'd like and the discount is worth thinking about. Before you know what's happening, you're giving details of your current account etc., etc., etc.
It's a familiar scenario. Over 40% of people who sign up in this way had no intention of doing so when they entered the store, according to the Office of Fair Trading, and yet they may well make a major purchase.
This isn't a problem if you have the money available to clear the balance within the interest free period, which can be from 35 to 55 days, in most cases. However, if you're unable to meet this time-limit you need to be aware that the interest on the outstanding balance can soon mount up.
The Consumer Credit card act sets down regulations for any loan under £25,000. Whether or not a total overhaul of these rules is necessary is under consideration.
Data provider Moneyfacts provide some enlightening information regarding the variation in store cards interest rates. John Lewis, which includes Waitrose, has an APR of 13% and Marks and Spencer offer 18.9%, whereas Debenhams and Comets Timecard are currently charging 28% and 29.9% respectively.
Before you sign up to one of these cards, take time to consider:
The discount may be a good deal and if there is a purchase that you are seriously considering anyway and you have the money to fund the purchase within the interest free period.
What is the APR rate on this offer? How much will you be charged on the remaining balance?
There may be an interest free period. How long does this last and when it ends, what rate will be charged?
Payment Protection Insurance will be offered. Check how much this is going to cost and what benefits are offered. This is an option but could prove a blessing under some circumstances, such as illness or redundancy. Read the agreement carefully to find out more.
Remember that you'll need to budget carefully for store card purchases - it's easy to overspend.
You don't need to sign there and then. Take the agreement away and check everything, including the interest free period, APR, default and late payment penalties. Ask questions until you're satisfied you fully understand everything.
The Office of Fair Trading endorses the above advice. They also advise that you compare the store card with other payment methods.
Don't be hassled into taking out a card you don't want by some pushy person who doesn't really care whether or not you're getting what's right for you, as long as they get their commission for signing you up!
Remember, as with credit cards, the statements come in monthly. Keep track of your spending. Credit cards with low APR's are, in general, a better deal than store cards, according to the majority of financial experts.
Both Mark Lambie & Michael Challiner are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.