Watch out for store credit that allows you to buy now and pay later. Buying goods and services this way usually means paying well over the odds in the long run.
Traditionally, August is one of the quietest times of year for UK businesses, with millions of people on holiday and thousands of businesses shutting down for a summer break. With the blazing weather we've been having, certain businesses, such as those providing household furnishings and fittings, have seen a drop in sales. After all, wouldn't you rather have a barbecue and an ice cream in the sunshine, rather than traipse round your local carpet store?
Nevertheless, once this sunny spell comes to an end, the autumn sales will begin in earnest, as retailers seek to dispose of old stock and introduce new lines. One common tactic employed by stores to drum up more trade is to offer 'interest-free' and 'buy now, pay later' finance.
Let's start with interest-free credit. Although it must do what it says on the tin (zero interest charged), it's very difficult (if not impossible) to get a 0% deal without paying the full retail price. That's because retailers have to pay finance companies a reasonable rate for lending you money, which they make back through higher profit margins on undiscounted goods. Thus, because it's harder to haggle, you end up paying more than if you negotiated a discount and paid in cash.
In general, 'buy now, pay later' deals include an introductory interest-free period (typically anything up to a year), followed by interest of around 30% a year afterwards. The cost of this loan can be so high as to wipe out any sale discounts even for half-price goods.
The best technique is to budget for the full cost of your purchase during the interest-free period, then pay off the entire loan before the extortionate interest rate kicks in. Alternatively, you can save money by paying with one of the many credit cards that charge no interest for six months and have a lower ongoing rate, say 15% or less.
Here how the cost of credit for a £500 purchase, using figures provided by leading online bank Egg
(LSE: EGG)
:
- PowerHouse (electrical retailer): 48 monthly repayments of £16.96 = £814.08, 29.8% APR
- Courts (furniture store): No repayments for 9 months, then £22.97 for 39 months = £891.93, 29.8% APR
- Egg Card: 0% for 6 months, then 13.9% APR = £12.65 for 48 months = £607.20
What's more, retailers will try to sell you pricey payment protection insurance to cover your monthly repayments, which sends the cost of your loan into outer space. My advice is to give it a miss.
Hence, you can see that signing up to a retailer's credit package can cost you hundreds even thousands - of extra pounds in interest. So, be savvy in the sales, and don't let nasty credit deals turn your bargains into expensive mistakes!
More: Find a better Credit Card | Get Out Of Debt | Win £2,500 Off Your Credit Card.
