FOOL'S EYE VIEW
The Evil Store Card Rip-Off

By Jane Mack (TMFJane)
August 25, 2005

One of my colleagues likes to describe store cards as "the Devil's debt" and I'm inclined to agree with him. They are the most expensive way to borrow money on the high street - in fact, I'd describe the interest rates as extortionate.

I had one once. I signed up for it on the spur of the moment because I spotted an outfit I just had to have and, when I took it to the sales counter, I was offered a 10% discount if I got a store card there and then. It took months for me to realise that of the £5 minimum monthly payments I was making, £2.37 of it was going on interest! At which point I woke up and smelt the coffee.

The Competition Commission has been investigating the store card market for more than a year now and their research indicates that most people sign up for store cards in exactly the same circumstances that I did and for the same reasons too. They're due to report their provisional findings next month after being asked by the Office of Fair Trading to investigate the sky high profits made by providers and the lack of transparency in the way they're sold to customers.

On the face of it, the store card market is comparatively small. According to the Commission, although there are nearly 16 million active store card accounts, they account for just 4.5% of lending on plastic. But around a third of people have one and they spend nearly £4.5 billion a year on them making profits of nearly £700 million for store card providers. It's an expensive way to borrow money with most of the main store cards charging interest rates of around 30% - an extraordinary situation considering the Bank of England base rate currently stands at just 4.5%.

So far the Commission has found that most sign-ups are unplanned and usually occur on the spur of the moment when a sales assistant suggests it. Women are more likely than men to have a store card and where they did they were likely to have several. For some reason, most of the customers surveyed appeared to regard their store cards as a less serious form of credit than other sources of credit. Therefore they afforded store cards less 'respect' and tended to use them more for frivolous purchases. Many were oblivious of the level of the interest rate and, anyway, didn't really care!

More importantly, more than half (53%) didn't pay off their cards in full every month. Average balances were about £80 for those paying in full; £250 for those paying between the minimum and the full amount and £800 for those paying the minimum.

Anyone with a store card debt of £800 charged at 30% APR and making minimum payments of, say, 3% of the balance each month would no doubt be horrified to find that it would take them 28 years and 4 months to pay off the card if they carried on that way. They'd also pay £2,852 in interest!

So if you have store cards and don't always pay off your bills in full, cut them up, apply for a 0% credit card and transfer the balance to your new card. This will give you breathing space to tackle paying down the debt. And if you want to take advantage of an initial discount offer, take the same course of action immediately after signing up for the card. Cut it up and transfer the balance if you're unlikely to pay off the bill in full when it arrives. After all, any benefits offered by the card could well be outweighed by a high interest rate.

And, if you do sign up for a store card, don't be conned into buying payment protection insurance (PPI), that other rip off product. The Competition Commission is investigating that aspect of store cards too.

PPI is hugely over-priced. Lenders pay out less than £1 in claims for every £5 they collect in premiums - that's a profit margin of more than 80%. And your monthly insurance premium is based on your statement balance so even if you pay in full, you pay the same rate as borrowers who roll over balances from one month to the next.

When the Office of Fair Trading carried out the study that first persuaded them to refer the investigation of the store card market to the Competition Commission, they conducted a mystery shopping exercise. It found that only 23% of shoppers were offered the chance to take the application form away with them and, of the remainder, three quarters were actively told they could not do so. In a third of cases, the mystery shoppers couldn't even find out any information about the interest rate.

That's the problem with signing up for a store card. It's the setting in which they're usually offered - in store, at the same time as you're making a purchase at the counter. And that's likely to make it difficult for you to focus on the details of the store card contract - particularly the interest rate and insurance terms and conditions. No wonder store card providers have been getting away with it for so long!

> Transfer your store card balance to a 0% credit card.