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."
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