Why Store Cards are a Bad Deal

Many stores offer their own cards these days, allowing you to buy from them on credit. They can seem like an excellent idea, especially if you want to spend a fair bit of money in the shop and don't have the cash. They can seem even more attractive if the sales assistant offers you an application and says that if you're accepted, you get a discount on everything you buy that day. They're a massive business; in 2005 there were over 11 million store card accounts in the U.K., with an outstanding balance of well over £2 billion. But store cards really aren't that great.

Things to Remember

A store card, just like every credit card, is a contract. You agree to pay off the balance you owe each month and if you don't, interest accumulates. But before you sign up for a store card, you'd better find out exactly how much you'll really be paying to use it.

Your first question should be - what's the annual percentage rate (APR)? If you take the time to compare it with the rates of your other credit cards, you'll almost certainly find that store cards carry a much higher APR. Indeed, in 2005, the only two store cards to charge an interest rate of less than 18.9% APR were IKEA Home (12.9% APR) and John Lewis (15.5% APR). All the others charged interest rates of up to 30.9% APR. That should give you food for thought.

Paying by direct debit each month could bring you a lower rate, but you might find you're restricted to paying either the whole balance or the minimum amount.

As with any agreement, always take time to check everything thoroughly. How long is the grace period? What are the penalties for default and late payments? Don't be afraid to ask questions and make sure the answers are clear and precise. Remember too, that in spite of any inducements, you don't need to sign anything there and then. Take the agreement home, read it and seek advice if you need before signing it.

One aim of the store card is to keep you coming back and create loyalty. However, obvious at it seems, remember that your card is only good for that store - unlike a regular credit card, you can't use it elsewhere, making it very restrictive.

Card Cover

If you go for the card, another item they'll try and push on you is Payment Protection Insurance (PPI). This is insurance - for an additional payment - that will keep up the payments on the loan in case you're in an accident, ill or you become unemployed. Usually the insurance will make payments for 12 months, but sometimes it's longer. Note, though, that the plan will only make the minimum payment due each time on the card - the interest will still accumulate.

Be aware that PPI is optional; it's not part of the agreement and you don't have to take it out, no matter how much they insist. New measures coming into force will bring a ban on the sale of payment protection insurance as part of a package. If a company fails to comply with the new rules, they could be fined.

Payment Problems

If you have problems making payments, contact the lender immediately. You can also try the Consumer Credit Counselling Service or the National Debtline.