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

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."

News
The clocks go forward an hour at 1am on Sunday 30 March
news
Arts and Entertainment
The Doctor finds himself in a forest version of London in Doctor Who episode 'In the Forest of the Night'
TVReview: Is the Doctor ever going stop frowning? Apparently not.
Sport
footballMatch report: Real fight back to ruin Argentinian's debut
News
Bruce, left, with Cream bandmates Ginger Rogers, centre, and Eric Clapton in 1967
people
PROMOTED VIDEO
Money
Welcome to tinsel town: retailers such as Selfridges will be Santa's little helpers this Christmas, working hard to persuade shoppers to stock up on gifts
news
News
i100
News
people
Arts and Entertainment
Architect Frank Gehry is regarded by many as the most important architect of the modern era
arts + entsGehry has declared that 98 per cent of modern architecture is "s**t"
Arts and Entertainment
Soul singer Sam Smith cleared up at the Mobo awards this week
arts + entsSam Smith’s Mobo triumph is just the latest example of a trend
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Compensation and Benefits Manager - Brentwood - Circa £60,000

    £60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

    Data Analyst/Planning and Performance – Surrey – Up to £35k

    £30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...

    IT Systems Business Analyst - Watford - £28k + bonus + benefits

    £24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

    Markit EDM (CADIS) Developer

    £50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

    Day In a Page

    Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

    Wilko Johnson, now the bad news

    Former Dr Feelgood splits with manager after police investigate assault claims
    Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

    Mark Udall: The Democrat Senator with a fight on his hands

    The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
    New discoveries show more contact between far-flung prehistoric humans than had been thought

    New discoveries show more contact between far-flung prehistoric humans than had been thought

    Evidence found of contact between Easter Islanders and South America
    Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

    Cerys Matthews on Dylan Thomas

    The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
    DIY is not fun and we've finally realised this as a nation

    Homebase closures: 'DIY is not fun'

    Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
    The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

    Air New Zealand's wizard in-flight video

    The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
    Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

    Pumpkin spice is the flavour of the month

    The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
    11 best sonic skincare brushes

    11 best sonic skincare brushes

    Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
    Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

    Paul Scholes column

    I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
    Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

    Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

    While other sports are stalked by corruption, we are an easy target for the critics
    Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

    Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

    Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

    A crime that reveals London's dark heart

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
    Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

    Lost in translation: Western monikers

    Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
    Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

    Handy hacks that make life easier

    New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
    KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

    KidZania: It's a small world

    The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker