Why Store Cards Are A Bad Deal
Many stores offer their own store cards these days, allowing you to buy from them on credit. Store credit cards 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. Store cards 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 About Store CardsA 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 credit card, you'd better find out exactly how much you'll really be paying to use it.
Your first question with a store card 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 credit 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 your store card 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 on the store card? 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 for the store card 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 store credit card is only good for that store - unlike a regular credit card, you can't use it elsewhere, making it very restrictive.
Card Cover For Your Store CardIf you go for the store 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 on the store card, but sometimes it's longer. Note, though, that the plan will only make the minimum payment due each time on the store credit 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.