It's Official: Store Cards Are A Con!

A consumer watchdog has decided that interest rates are too high and the store-card market is anti-competitive. Here's how to beat this system and come out ahead.

The Competition Commission today announced the provisional findings of its investigation into the store-card market - and they don't look good for the firms behind the scenes!

The Commission has provisionally concluded that the supply of store cards and related insurance is anti-competitive, leading to higher interest rates than fair competition would support. It reckons that shoppers are paying up to £100 million a year more than they would if store cards charged fair rates for finance and insurance. It recommended that providers should include warnings on monthly statements to inform cardholders of interest rates and other charges.

For more than a decade, I worked closely with the store-card industry, so I know its shady practices only too well. Indeed, I was employed by a division of GE Capital, the market leader for store cards, from 1994 to 1997. Many of the UK's leading retailers have outsourced the running of their store-card business to GE Capital Bank, giving it a majority share of the UK's 14 million store-card accounts.

It doesn't take much homework to conclude that this market isn't fair; just take a look at the following figures from Moneyfacts:

Store cards: the bad guys!

So, as you can see, all but three of the twenty most expensive store cards are issued by a single firm: good old GE Capital Bank. Talk about having a market wrapped up!

What's more, no matter what happens to interest rates elsewhere, store-card rates are kept artificially high. The Bank of England's base rate has tumbled since 2001, and is currently just 4.5% a year, yet store-card rates have remained sky high. Indeed, most of these cards haven't changed their rates since 1999 - and some haven't changed since the year that Labour took office (1997)!

Store cards: the Best Buys

Now let's look at the lowest store-card interest rates (under 20% APR):

The mean average annual interest rate charged by the 33 cards that I analysed was 26.5% APR, but 25 of these cards charge more than this average. Hence, the vast majority of store cards charge at least six times the Bank of England's base rate - a higher rate than even the most expensive mainstream credit cards.

With total store-card debt exceeding £2½ billion, these rates are a licence to steal! However, about four out of nine store-card users (43%) settle their bills in full and pay no interest, so the interest burden is carried by the remainder, many of whom are young, financially unsophisticated or lower-income customers.

However, the rip-off doesn't stop there, because there's an even more lucrative product on offer: payment protection insurance (PPI). Having worked in the PPI industry for eleven years before joining the Fool, I believe that this is the UK's biggest financial rip-off. Hence, I'm delighted that this market is now under investigation, as we revealed on Monday in Rip-Off Policies Under Attack. My campaign over the last three years to improve the store-card and PPI markets is finally beginning to pay off!

Finally, here are five ways to make the most of your store card:

1. Take advantage of introductory offers. If a store card gives you a tenth (10%) off your first purchase, make sure that it's a big one, but only if you can afford to pay off your bill in full.

2. By all means, go along to exclusive cardholder evenings, but don't be tempted to overspend.

3. Don't buy expensive PPI or other add-ons, such as purchase and price protection, as they are universally overpriced.

4. Never borrow money on a store card. If you do have a balance on yours, transfer this debt to a 0% credit card today. This will give you an interest-free breather of up to a year - learn more in From 30% To 0% In Sixty Seconds!

5. If you don't have a windscreen scraper, a store card makes an excellent substitute on frosty mornings!

More: Check out the charming 0% cards in our Credit Card centre! | The Great Store-Card Swindle!