The worst Christmas gifts rip-off... ever!

Find out why it's not a good idea to use a credit card from a shop to buy Christmas gifts.

I was in a department store earlier this week, shopping for some new furniture and peacefully minding my own business. As I was sitting on a bed and eyeing up the price-tag, a shop assistant came up to me with a big smile on her face. "Would you like to take out a store card today?" she asked, completely unaware that she was about to feel the wrath of a small, curly-haired, store-card-loathing dragon, aka: yours truly.

The fact is, this is one of the most dim-witted questions you could possibly ask a writer for lovemoney.com. "Absolutely not!" I told her ferociously, before demanding: "What's the APR?"

As my husband looked on, embarrassed and wishing he was in a galaxy far, far away, she went away to check with her manager. That's right, she didn't know.

It was at this point that I started breathing fire. It drives me crazy that, unlike a mortgage or an insurance policy, people can sell store cards without any formal training - never mind a recognised qualification.

The APR or Annual Percentage Rate of the average store card is 28.8%, almost twice the rate of a normal credit card.

This means that, if you don't pay off your bills in full every month, you pay 28.8% more than the purchase price - twice as much as you would be charged on a typical credit card, and about 57 times the Bank of England Base Rate (the rate at which the Government lends money to banks).

No wonder so many Christmas shoppers rack up thousands of pounds of debt on these rip-off cards.

Call me cynical, but I suspect that some people are duped into taking out on these cards because the friendly shop assistants who sell them have little idea how much of a stinking rip-off they really are.

But am I being a bit unfair here? Are these cards really such a rip-off? And if so, what's wrong with them?

Painful purchases

Let's look at the facts. On the face of it, many store cards offer what seem like fantastic discounts and benefits. For example:

Dorothy Perkins: 10% off for three months and free delivery on orders over £60.*

New Look: 20% off first purchase.

House of Fraser: 3 points for every £1 spent in-store, 6 points for every £1 spent online.

*Among other offers

So far, so good. But let's take a look at how much I would ‘save' if I took out a store card at Dorothy Perkins, bought myself a sparkly new Christmas party outfit, and then only made the minimum payments on my Dorothy Perkins store card, which charges 29.9%:

When I hand over the card to pay at the till, I think I am saving £15 with the 10% discount.  But as the table shows, the dress would actually end up costing me an extra £66 on top of the retail price of £130.50, just because I used the store card instead of paying by cash.

Effectively, that 10% discount actually costs me more than four times what it seemed to save me.

And remember, I got a 10% discount with this purchase. If I had then gone back and bought something else three months later, when the discount no longer applied, the relative cost of using my card would have been even higher.

Buy now, pay later

While I personally avoid them like the plague on principle, I should emphasise there's nothing inherently wrong with store cards, as long as you pay your balance off in full every month. You'll get the discounts and the benefits, and you won't pay a penny in interest.

However, you do need to read the small print, and watch out for penalty charges. For example, Santander - which issues the store cards for Topshop, Harvey Nichols, Burton, Dorothy Perkins, House of Fraser and more - can now charge a fee of up to £10 if you are in credit for three consecutive months or don't use the card for six months! So you'll have to make a purchase every six months on the card, and if you ever get a refund on your purchase, you'll have to spend it pretty sharp-ish. 

What's more, if you prefer to ‘buy now, pay later', these cards are definitely not your best option. Instead, you should opt for a credit card that offers 0% interest on new purchases. That would mean you could bung all your new purchases on a card and, as long as you paid the balance off in full before the year was up, you wouldn't be charged any interest. The market-leading 0% on purchases card available at the moment is the Tesco Clubcard credit card, which allows you to spend interest-free for a whopping 15 months!

For your information, here's a list of the most expensive store cards:

Source: Moneyfacts

If you have any balance outstanding on these cards, I suggest you switch over to a 0% balance transfer card immediately. This will ensure you stop paying interest on your balance for a few months, allowing you time to pay off your debt without racking up punitive charges. You will usually be charged a small transfer fee, but it should still work out much cheaper than keeping your balance on a store card.

Christmas Spirit

Finally, a word of warning. It's the start of the Christmas shopping season and, with hundreds of shoppers set to enter their doors over the next six weeks, department stores are stepping up their efforts to sell new customers their rip-off cards.

So if a shop assistant comes up to you and invites you to take out a store card, think very carefully. Unless you're 100% sure that you can pay off the balance each month, steer clear!

Compare credit cards at lovemoney.com