This store card rip-off won't die!

Store card rules were introduced five years ago this month, yet they've failed to clean up the mess.

In September 2006, the Competition Commission ruled that the market for store cards was anti-competitive. What's more, the Commission estimated that the lack of proper competition meant that cardholders were being overcharged to the tune of £100 million a year.

In particular, issuers charged cardholders rip-off interest rates for borrowing on store cards, as well as collecting sky-high premiums for the dreaded PPI (payment protection insurance).

The Commission cleans up

As a result of this ruling, new rules were introduced to clean up this massive mess on from May 2007.

Here's how the Competition Commission tried to clean up this store-card con:

1. All card issuers charging rates above 25% APR (almost 1.9% a month) must display notices warning customers that cheaper credit is available elsewhere.
2. Card issuers must include messages on monthly statements to warn cardholders of the risks of paying only their minimum monthly repayments (MMRs).
3. Card issuers were banned from selling PPI as a package, forcing them to sell this pricey protection separately.

The Commission hoped that these new restrictions would stamp out the store-card market's worst excesses. Sadly, more than five years later, store cards are still a swindle!

Why use a store card?

To show you what I mean, I conducted an exclusive survey for lovemoney.com, to demonstrate the pros and cons of store cards. Let's start with the three main attractions of store cards:

1. Interest-free credit

Of the 24 store cards currently on offer, all offer interest-free credit lasting between 51 and 59 days. However, this 0% deal is available only to cardholders who always pay off their monthly bills in full. Those who can't or don't end up paying some of the highest interest rates on the high street.

2. Freebies and other rewards

To lure you into opening an account, card issuers will offer a raft of introductory offers and ongoing incentives to use their card.

For example, an Allders card gives you two reward points for every £1 spent at Allders, while a New Look card gives you up to 15% off your first purchase, plus exclusive cardholder offers and promotions.

Usually, being a cardholder gives you access to various extras, such as 'buy now, pay later' plans, special offers and events, exclusive cardholder preview evenings, prize draws, reward points and discount vouchers.

3. Convenience

With a single card, you can shop at a wide range of shops. For example, these three cards can be used in multiple outlets:

• Burton: Bhs, Burton, Dorothy Perkins, evans, Miss Selfridge, Outfit, Top Man, TopShop and Wallis.
• DUET Network cards: Allders, Ann Summers, Brantano, Carphone Warehouse, Clarks, D2, Ernest Jones, Focus, H Samuel, HMV, Interflora, JJB Sports, La Senza, Leslie Davies, M&Co., National Tyres, Peacocks, Pilot, Quiz, Sainsbury's, Selfridges, T J Hughes and USC.
• Edge Card: able2buy, Babies’R’us, Comet, Ernest Jones, H Samuel, Halfords, Holiday Time, Interflora, Mesh, Reid Furniture and Toys’R’us.

In short, if you use your store cards wisely -- spending only what you can afford to repay and always paying off your bill in full -- then they are useful additions to your wallet or purse.

High-street robbery

Then again, what if you splurge on a store card and can't pay off this debt right away? This is where the card issuers make a killing, thanks to their rip-off interest rates.

Here are the UK's 24 store cards, sorted from highest to lowest interest rate:

Source: Moneyfacts, 17 May 2012

As you can see, for payments by Direct Debit, nine store cards charge an APR (Annual Percentage Rate, or yearly cost) of 29.9%. A further three charge 28.9% APR, meaning that half of all store card charge these two top rates. Of the remaining cards, seven charge rates of between 28.0% APR and 23.9% APR.

At the bottom of our table, we have Fortnum & Mason (15.3% APR) and four cards all charging 19.9% APR (from Debenhams, House of Fraser, Laura Ashley and Topshop/Topman).

Overall, the average APR for payment by Direct Debit is a whopping 26.6% APR.

What's more, if you don't pay by Direct Debit, then your interest rate can be as high as 30.9% APR (at Quiz and USC). For non-DD payments, store cards charge an average rate of 27.0% APR.

Making a killing

Since March 2009, the Bank of England's base rate has been stuck at a record low of 0.5% a year. Such a low base rate means that banks and other lenders can borrow very cheaply and then lend on this money to consumers at much higher rates.

As a result, store-card issuers are absolutely coining it in. By borrowing cheaply and lending to cardholders at rates of, say, 27% a year, these lenders are making a killing. Even after accounting for bad debts and running costs, store cards are a licence to print money.

How to kill a store card

If you have a stubborn balance on a store card, but also have a good credit history and rating, then my advice is simple. Transfer your balance (or even multiple balances) to a 0% credit card.

By doing this, you can freeze' your interest bill for up to 22 months. Although these balance transfers usually incur a fee of around 3% of the value of each transfer, this is a small price to pay. After all, paying this modest fee will enable you to dodge interest rates averaging 26.6% APR, or 2% a month!

More on credit cards:

Pay no interest on your credit card for 22 months

Sainsbury's launches top low-rate credit card

The 0% credit card that improves your credit rating

The cheapest balance transfer card around

Why the best balance transfer card just got better