Sam Dunn: To rack and ruin with store card interest rates

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The Independent Online

You must either be financially prudent or have a strong constitution if you didn't choke on your cornflakes when opening the envelope containing the credit card bill for your Christmas spending.

You must either be financially prudent or have a strong constitution if you didn't choke on your cornflakes when opening the envelope containing the credit card bill for your Christmas spending.

If, like many, you have a couple of credit cards and a store card, this stark reminder of a festive spending blowout can be hard to swallow.

On the other hand, if you're one of those enviable shoppers who strictly marshal their finances and pay off debts every month, the initial shock should by now have subsided and left you with a mental note not to over-indulge next time.

But for the millions who cannot repay their bills in full each month, the debts will prove more unsettling.

In particular, those who bought goods on store cards during the festive season - and more than five million of us did, according to research from the Uswitch price-comparison website - should shift this debt as soon as possible.

It's one of the ugliest and most expensive forms of credit, and it's sold to us when we're at our weakest - surrounded by shiny goods, tempted by a chunky discount and cajoled by canny sales staff chasing commission.

The cost to those who don't - or can't - pay it off each month is little short of scandalous.

The annual percentage rates (APRs) charged lie, in most cases, between 25 and 30 per cent - nearly six times the Bank of England base rate.

Stores such as fashion retailer Monsoon offer cards at 28 per cent, House of Fraser at 27 per cent, and Habitat and Mothercare at 26 per cent. All are at least 10 percentage points higher than regular credit card deals that are uncompetitive themselves.

If you were to pick up a £240 coat using a store card with an APR of 29, and paid back only the minimum amount of interest each month, it would cost you nearly double the price - and take years to clear.

The real worry is that those who can't afford to pay their store cards off each month end up paying huge sums of interest - and in effect subsidise the purchases of those who do clear their balance.

But these obscene rates are nothing new: they've been hanging around at this inflated level for years now.

Quite why store cards cost so much is the subject of a continuing investigation by the Competition Commission, which last week asked for fresh opinion on what it called "the nature of competition" in the store card sector.

It voiced concern that there wasn't enough "competitive pressure" and that this was favouring the shops and credit companies behind the cards, rather than customers.

Tellingly, Professor Paul Geroski, chairman of the commission, suggested that this may well be down to our being "insensitive to these [APR] charges".

If this is the case, it's hard to know which is the bigger disgrace: unscrupulous profiteering or shameful ignorance on our part.

Of course, nobody is forced to use a store card, but concern is regularly raised by consumer groups at the way these cards are sold.

In particular, there is much anxiety over the failure of shop employees to explain card costs fully - and especially the details of payment protection insurance, which can often prove a useless piece of cover.

Many might also wonder why, when the base rate halved from 7 to 3.5 between 1999 and 2004, many store card rates barely moved.

An accusing finger has been repeatedly pointed at GE Consumer Finance, the credit firm that supplies cards to nearly half the UK store card market. Of the four credit businesses controlling 90 per cent of the market, it is the biggest - and boldest - by far.

It refutes suggestions of anti-competitiveness, and claims that the Commission's focus on store cards instead of the wider credit industry is misplaced.

This is both absurd and arrogant; any transparency that Professor Geroski and his team can bring to the store card industry is going to be welcome and help customers make a better-informed choice the next time they consider taking out the plastic.

His conclusions will hopefully lead to industry reform or, at the very least, force us to crack down on our own store card habit.

s.dunn@independent.co.uk

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