Store cards: the debt that can last a generation
They might seem convenient when you're at the till, but if you only pay off the minimum amount each month the interest quickly racks up. Julian Knight looks at a very expensive way to shop
Sunday 28 September 2008
You can do a lot of things in 15 years. You might start a family and pilot your kids through the troublesome teenage years. Or maybe you'll begin a new career and see it flourish. Or perhaps, if you're really good with the pennies, you will pay off the mortgage early.
A less pleasing prospect, without doubt, is spending those 15 years paying off a store card debt of just £1,000 because you've only chosen to make the minimum monthly repayment. As Michelle Slade from financial information firm Moneyfacts says: "The combination of high interest rates – up to 30 per cent – and the requirement only to make a monthly repayment of 4 per cent or less of the balance outstanding means that even relatively small debts can hang around for 15 years or more.
"People taking out these cards and using them may simply be making the minimum repayment their statement asks for each month, not realising that the vast bulk of the money is going in interest charges and that there may be no end in sight of the debt," she adds.
And things are set to get worse, according to Moneyfacts, as store card interest rates – already more than three times the level of the "best buy" credit cards – are on the rise.
Experts reckon this is because the banks that operate the cards, and the retailers that put their name to them, are desperate to squeeze every ounce of profit out of them as the economy founders and the credit crunch goes from bad to worse.
In the past few days, for instance, high street womenswear chains Karen Millen, Oasis and Principles – all brands owned by Mosaic Fashions – have increased their rates by 4.3 per cent to 28.9 per cent, and that's even though most analysts reckon the next move in the Bank of England base rate will be downwards.
"There is horse-trading going on between the retailers and the banks. The retailers – particularly those in the clothing sector – are sitting on millions of pounds worth of stock they must sell, and for that they need more credit to be available in store. However, the banks, in the teeth of the credit crunch, are reluctant to lend any more cash," says David Kuo from financial advice website Fool.co.uk.
"The trade-off is that the banks are getting to charge more in interest, and we are even seeing the minimum monthly repayments falling too," he adds.
And the profits that can be made from persuading customers only to make the minimum repayment can be considerable.
"Put simply, if you do just pay the minimum then not only will it take a generation to pay off even a £1,000 debt, but you will also pay more than the amount borrowed in interest alone," adds Mr Kuo.
Moneyfacts' figures bear this out. The company has calculated that if a customer borrowed £1,000 on the store cards offered by Oasis, Principles or New Look today, and only chose to pay off the minimum amount each month, they would end up paying £1,213.10 in interest – and would not have cleared their debt until the start of 2024.
Mr Kuo adds that there is only one good reason to take out a store card: "Some sales people – who are no doubt on commission – will offer a discount on the item you're purchasing if you take out the store card when buying something. If you go down this route you must pay off the card balance before interest is charged, and then I suggest cutting it up."
But Edward Simpson of the Finance and Leasing Association (FLA), which represents the store card industry, says account holders get other benefits: "Some retailers will do special preview sales evenings or one-off discounts for customers paying by store card. They aim to reward loyalty."
However, Mr Kuo is again sceptical about any benefits: "In the present climate you can find sales on everywhere almost any time, which further negates the need for one of these cards."
The store card industry is supposed to be cleaning up its act. Following an inquiry in 2006, the Competition Commission last year instructed providers to print what amounts to a health warning on their account statements when their card levies a rate of more than 25 per cent. These warnings are there both to highlight the size of the charge and the consequences of making only the minimum monthly repayments.
Now, with the recent round of interest rate hikes taking several cards above the 25 per cent threshold once again, the firms will be forced to comply with the Competition Commission's ruling.
Nevertheless, Mr Simpson says that customers are getting a fairer deal than before the inquiry: "The industry has really taken this on board and is more transparent about the rates charged. Remember, the actual level of debt on these store cards is actually quite small compared with credit cards, loans and mortgages, and the average sum owed by customers is only £156."
He adds that store cards have fallen out of favour of late, with some retailers preferring to offer branded credit cards that can be used anywhere.
But according to Frances Walker of the Consumer Credit Counselling Service, the debt advice charity, store cards are still playing a full part in Britain's debt crisis: "It's rarely the case that someone has just store card debt, but it's often there in the background. It's expensive and can hang around for a long time."
What's more, Ms Walker says that store cards tend to be taken out by people on lower-than-average incomes who are less able to pay the money back fast enough to avoid being punished by the high rates charged.
"But I suppose it is better than the only other credit option that people on low incomes are offered, namely taking out a doorstep or payday loan which both tend to be short term but at very high interest, sometimes in excess of 100 per cent."
How couples can protect their financial interests when cohabiting
Authorities failing in hunt for 'most wanted' tax dodgers who owe HMRC £844m
A student's guide to financial survival: You don't have to drown in debt at university
Bargain Hunter: Kit yourself out in sports gear - at a healthy discount of up to 75%
The HiFX guide to managing corporate foreign exchange and international payments
- 1 Arizona shooting: Gun instructor accidentally killed by nine-year-old girl with Uzi
- 2 Miley Cyrus' homeless MTV VMAs date, Jesse Helt, is wanted by the police
- 3 Paul Scholes: Manchester City were so good against Liverpool I felt like turning the television off
- 4 Notting Hill Carnival: Woman shares selfie after being ‘punched in face for telling man to stop groping her’
- 5 Pamela Anderson rejects ice bucket challenge because of ALS experiments on animals: 'Mice had holes drilled into their skulls'
Exclusive: We share blame for creating 'jihad generation', says Muslim strategist
Robin Williams Emmys tribute led by Billy Crystal criticised for including 'racist' joke about Muslim woman
The Rotherham child abuse scandal is a tale of apologists, misogyny and double standards
Scottish independence TV debate: Pumped-up Alex Salmond bounces back in bruising second round against Alistair Darling
Do you realise just how foolish the UK looks?
Arizona shooting: Gun instructor accidentally killed by nine-year-old girl with Uzi
- < Previous
- Next >
iJobs Money & Business
£350 - £400 per day: Orgtel: PMO Analyst - Risk - Banking - London - £350 - £4...
£40000 - £48000 per annum + benefits+bonus+package: Harrington Starr: C# Devel...
£45000 - £60000 per annum + benefits+bonus+package: Harrington Starr: C# Swift...
Negotiable: Harrington Starr: A fast growing Financial Services organisation b...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony