The Competition Commission warns consumers about problems in the store-card market. We explain why you should steer well clear of the "Devil's Debt"!
Store cards are among the UK's biggest financial rip-offs and yet we have around 18½ million store-card accounts, with 23 million cards in circulation.
The Office of Fair Trading asked the Competition Commission to investigate the store-card market last March, after it concluded that store-card issuers were making sky-high profits. The commission invited responses to its interim report by the end of this month, and should release its provisional findings in April. If it finds evidence of any anti-competitive behaviour, it will suggest remedies to make the market more consumer friendly, before submitting its final report next year.
Today, the Commission warned shoppers that, thanks to limited competition, retailers and lenders in this market have little incentive to cut their interest rates. What's more, many consumers are ignorant as to just how high store-card charges can be.
Although store cards account for only a fortieth (2.5%) of total unsecured lending, about three in ten adults (30%) have one. What's more, we spend about £400m a month on them, or about £260 a year per account.
One big problem with store cards is that just four card issuers control more than 90% of the market. Market leader GE Consumer Finance, which issues cards on behalf of dozens of retail groups, accounts for around half of all cards in issue. What's more, GE and its rivals sign long-term agreements with retails, some of which run for ten years, which helps to lock out other companies and stifle competition.
But just how expensive are store cards? These lenders borrow money at close to the Bank of England's base rate, which is currently 4.75% a year. However, most store cards charge annual interest rates of between 25.9% APR (Argos) and 30.9% APR (Creation Account cards). This is between 5½ and 6½ times the base rate, which is some mark-up it's a licence to print money!
What's more, the base rate has plunged since 2001, whereas store-card rates have barely budged. Note that, with an interest rate of 31% APR, your debt doubles every 2½ years, thanks to interest alone. Yikes!
Most bog-standard credit cards charge annual interest rates of 10% to 20% lower than these levels, yet still turn in a healthy profit. Still, the best of this evil bunch are IKEA Home (12.9% APR), John Lewis/Waitrose (13% APR), Fortnum & Mason (15.3% APR), Liberty and Marks & Spencer Money (both 18.9% APR).
So, if you want to avoid high-street robbery, follow this advice:
- By all means, take out a store card to take advantage of introductory offers, such as a tenth (10%) off your first shopping spree, special offers, incentives and promotions.
- However, NEVER borrow money on a store card always pay off your bill in full every month. The best way to ensure this happens is to set up a Direct Debit for the entire balance. Sadly, almost two in five cardholders (38%) fail to do this and get walloped by hefty interest bills. Ouch!
- The great store-card rip-off doesn't end with interest charges. Other add-ons, such as payment protection insurance (cover for death, accident, sickness and unemployment) are mind-bogglingly expensive. If you don't want to hand over, say, 90% of your premiums in commission to the card issuer and retailer, don't buy these outrageously priced bells and whistles.
- If you have an outstanding balance on a store card, transfer it to one of the sixty or so 0% credit cards. These don't charge interest on balance transfers for anything up to a year. (You can find several in our Credit Card centre.)
- If you want the best card for shoppers, try the Sainsbury's Bank VISA card, (also available in our Credit Card centre). It charges no interest on new purchases for a whole year, plus money-saving vouchers, cashback or Nectar points. It's the ultimate card for the January sales, by far!
Finally, I've come up with a great seasonal use for your store card. If you haven't already cut it up, it makes a great scraper to remove frost from your car windscreen on freezing mornings!
More:Ten Crafty Card Tricks | Check out the cards in our Credit Card centre.
