Store Cards: ‘the Devil’s Debt’?
Many people reading this will not be aware of what a store card is, and those who do are likely to be in the dark as to its role in creating dangerous levels of debt. As such, MoneySavingExpert.com has labelled them ‘the devil’s debt’ and Resolver, an online complaints service, has found that complaints against store cards have almost tripled this year.
But what are they, what makes them so dangerous, and what can you do about them?
Store cards are, quite simply, credit cards – they allow you to buy something and pay it off later, with interest being added as time goes on. The most significant difference between store cards and other credit cards is that they only work in one store, with stores such as New Look, Topshop, and Oasis each having their own version.
They were introduced with the aim of encouraging loyalty from customers, and this has been largely successful as 40% of consumers say that they are more likely to return to a store that they have a store card with. In order to entice customers, store cards usually offer introductory offers, such as 20% off the first purchase, and membership benefits.
Why are they so bad?
- Interest Rates
All Store Cards charge interest that is higher than standard credit cards- around two thirds of them charge a terrifying rate of 25% APR or above, while some, such as Miss Selfridge, reach almost 30% APR. These excessive rates are the most crucial problem surrounding store cards, as a shopping trip of £100 can quickly become £128, then £160, or more!
- How they are sold
Another problem, which exacerbates the dangers of these high interest rates, is the way that store cards are sold. They are often sold by untrained shop staff, who are incentivised for signing people up, but don’t fully understand the impacts of the card’s interest rates. The welcome discounts and benefits are pushed, but it is never fully explained that the customer is getting a credit card. Issues such as interest, payment dates and charges are left to a leaflet, rather than being explained in person. As such, it is understandable that consumers could view the card as more of a loyalty card than a credit card.
- Store Cards and Millennials
As part of this push to ‘sell, sell, sell’, store cards are often targeted towards the less financially informed members of society, most notably the old and the young. For example, research by Vyze and Ipsos has noted that Millennials are boosting sales of store cards; while 40% of consumers are more likely to return to a shop where they have a store card, this statistic rises to 60% for Millennials. In order to further appeal to this market, it is likely that techniques such as store cards will become increasingly digital, and increasingly easy, making the situation more severe as time goes on. Similarly, awareness of these ‘point-of-sale’ financing options has also increased in recent years. Vyze and Ipsos revealed that 78% of consumers were aware of them, as compared to 51% of consumers in 2015. As store cards gain prevalence, it becomes even more important to educate people, particularly young people, on the dangers of such high-interest credit cards.
Ultimately, the problem comes down to a fundamental misunderstanding of what store cards are. For many consumers, they appear to be a form of ‘loyalty card’. This is not true – they are credit cards, plain and simple, and particularly nasty credit cards at that. Educating consumers about this, particularly the young, is going to become more and more important as sales tactics like this become more accessible and better known.
The most basic piece of advice we can offer is: don’t take out a store card. While many people feel that they can ‘play the system’ and only get the welcome deal, unless you are supremely confident that you will be organised enough to pay off and cancel the card as quickly as you can, we don’t advise trying. Many people in debt due to store cards became that way through trying this trick and finding that life got on top of them before they were able to pay off and cancel the card. This is a trick that is too high risk!
For those who are still considering taking one out, there is one rule that should never be broken: don’t use a store card to borrow on. The interest rates are simply too high, and you will quickly find yourself in trouble. Also, it is important to remember that taking out lots of credit in quick succession (and store cards are credit cards!) can affect your credit score. This will make it more difficult to take out credit in future.
No one is perfect, and falling into debt is easier than you think. What do you do if ‘the devil’s debt’ has already taken hold?
There are many options available for people struggling with debts. If you have over £6000 of debt from a number of creditors, which could include a store card, then an IVA or a Trust Deed may be great way to regain control of your money.
However, there are a number of different solutions available for a wide variety of situations. If you are only struggling with one store card, but that huge interest rate is getting the better of you, it may be worth paying the entire amount off with a 0% Balance Transfer Credit Card.
This type of credit card has 0% interest for a limited period of time, so should prevent more interest being added to the overall amount, giving you time to pay it off. However, make sure you fully understand your 0% Balance Transfer Credit Card before you do this. They will often charge a fee so make sure to take the fee into account when doing your calculations.
Finally, remember that if you are not able to pay off the entire store card debt before the 0% interest runs out, then you may end up back at square one.
If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.
12 July 2017
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