Today's news that store cards cost British consumers almost £1 billion more in interest than other forms of plastic serves as a stark warning in the run up to Christmas. If you must rely on credit to meet your Christmas costs, make sure you avail of the cheapest loans available.
With interest rates averaging about 25% APR store cards are definitely not a cheap source of credit, in fact they are extortionately expensive. Even credit cards, which themselves are considered a pricey option, shouldn't cost you more than about 15% APR.
As a general rule, store cards should be avoided. However, they do have incentives and attractions that continue lure consumers in. Some of these include:
- 10 per cent off your first purchase.
- Priority given to store card holders at sales and events.
- Purchase points that awarded to you when you use your store card. When you get enough of these you can avail of free vouchers or further discounts.
If you avail of a store card with an interest free period and pay off your balance on time each month, you can avail of these benefits without it costing you a penny. However, the responsible use of store cards seems to be the exception rather than the rule and they end up costing a lot of people a lot of money.
Also, many store card holders are the victims of hard sell. Sales assistants are often paid generous commissions for new store card sign ups and will be quite happy to highlight the benefits of the card without explaining the true cost.
Any benefits a store card might offer will rarely justify what it will cost you. When offered a store card, you should apply the same criteria as you would when applying for a credit card. Check the APR and all penalty charges, as well as the cost of any associated insurance or payment protection plans.
If you take note of these costs and compare them with standard credit card costs, you will most likely find that they are very high. Also, do not make the mistake of thinking a store card application will be accepted when a credit card application might be refused. The same credit checks will be in place.
While store cards are the worst offender, credit cards are also a very expensive way to cover your Christmas costs. British consumers already owe £64.7 billion on their credit cards. What is more, credit card holders are in a position to borrow a further £112 billion if everybody availed of their full credit limits.
“Almost four million cardholders could each get into over £20,000 of credit card debt yet the average outstanding balance for all cardholders is £2,060, suggesting consumers could be getting savvier about the perils of too much borrowing on plastic,” says Rob Kenley, head of credit cards at moneysupermarket.com.
“In the run-up to the festive season, we are urging cardholders to be wary of overspending on the credometer – it’s easily done but the New Year financial hangover could be painful.
“It would be a £177 billion headache for the nation if everyone maxed out their credit cards on a crazy splurge. To put it into context, that is almost equivalent to the UK's Health and Education budgets put together.”
Christmas can be an expensive time for all of us. However, there are ways of cutting the cost of Christmas credit, while simple budgeting ahead of the festive season will go a long way. Click on the links to find out more.