Hidden cost of store cards can seriously damage your wealth

When that shop assistant offers you 10 per cent off if you sign up today, beware, warns Helen Monks
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The Independent Online

The heat is on store cards, the plastic credit offered by retailers that hits loyal customers with sky-high interest rates, often as much as 30 per cent a year or more. Saying yes to smiling shop assistants who ask if you would like 10 per cent off your purchase by signing up to a store card can easily lure borrowers into serious debt.

A forthcoming Office of Fair Trading (OFT) review of the cards is expected to lead to a full investigation by the regulator which could ultimately force store-card providers to change the way they do business.

And the Department of Trade and Industry is to respond to a highly critical Treasury Select Committee report into credit and store cards within weeks. The report called for the planned Consumer Credit Act to include legislation imposing a single method for calculating annual percentage rates.

This week, a survey indicating most consumers are confused by the different methods credit-card firms use to calculate interest. The survey, by the internet bank Egg, used 10 methods to calculate interest customers paid on outstanding credit card balances. Payments often varied from card to card, even ones with the same headline APR.

Among the worst offenders is the Duet card which can be used at Selfridges and Warehouse, which punishes shoppers with an APR of 30.9 per cent. And unless customers pay more than the minimum balance every month, the debt swiftly grows considerable because of the rapid build of interest.

One of the Treasury Select Committee members reckoned if someone were to borrow £500 on a typical store card and pay only the minimum balance, they would take 10 years to whittle the debt to zero, and interest costs would equal the amount spent on the purchase. Stuart Glendinning, director of credit cards at the financial product comparison website moneysupermarket.com, says: "It would take 164 months (13 years, nine months) to pay off a £1,000 debt on a Debenhams store card at 29.9 per cent if the minimum monthly repayment of 4 per cent was paid, and total interest payable would be £1,158.28.

"But by switching this debt to the Royal Bank of Scotland Mint card, charging 0 per cent on balance transfers and purchases until 1 October, 2004, it would take 98 months (eight years, two months) to pay off and total interest payable would be £177.69, a saving of £980.59."

Laura Ashley and Russell & Bromley charge 30.7 per cent. Monsoon and Arcadia Group, which owns Burton, Evans, Top Shop and Dorothy Perkins, both charge 29.9 per cent. John Lewis is a notable exception, with a standard APR on its store card of 13 per cent. Marks & Spencer's &more card charges 18.9 per cent, closer to big banks' credit card rates.

Frances Walker, of the debt charity the Consumer Credit Counselling Service, says: "Interest rates are very high and there are few exceptions out there. If you pay only the minimum, your sales bargains can very soon turn into very expensive purchases."

The OFT review is examining the issues raised by the Treasury Select Committee last year. That committee wants interest rates, plus transparent conditions and charges clearly marked in store card agreements, and the OFT to look at the availability of consumer information.

But some store cards can work for you. Benefits to cardholders can include 10 per cent off your purchases when you sign up, 10 per cent off thereafter, in-store magazines and invites to evening preview events where cardholders might get first crack at sales items.

Debenhams' store card offers 10 per cent off everything, and it invites card-holders to sale preview evenings. They may also get vouchers for money-off products as well as a 56-day interest-free period on purchases. Those who take the interest-free period before paying their balance off in full every month will come out on top.

But Mr Glendinning is more circumspect. He says: "The only two good things that store cards are useful for is obtaining a discount on purchases and for scraping the ice off your windscreen on frosty mornings."

But no one need pay interest on their credit purchases if they can shift their credit balance from one 0 per cent finance card to the next. The website, Moneysupermarket. com, says there are 60 cards offering introductory 0 per cent interest periods of six months or more, if not for new purchases, then for balance transfers.

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