If you're looking for smart ways to save money -- or have already started panicking about the cost of Christmas -- beware the sneaky store cards that will actually inflate your spending!
This article was first sent to Fools as part of The Good, The Bad and The Ugly email series.
With the cost of essential goods and services on the up, the economy looking shaky and the cost of borrowing high, it's hard to feel anything other than apprehensive as the festive season approaches.
Personally, I'm dreaming of a `black' Christmas. I'm going to do everything I can to avoid going into the red to buy presents or enjoy the parties I'm invited to -- but I know it won't be easy.
So, I don't blame you if phrases such as "10% off today", "special offer for cardholders" and "buy now, pay later" sound like music to your ears right now.
However, when offers like these are conditional on your taking out a store card, they can end up costing -- not saving -- you money.
Store card cynics
We at The Fool have long been suspicious of store cards. In fact, we've often referred to them as `the Devil's Debt', because of their astonishingly high APRs and the tricky tactics (such as those above) used to promote them.
Often, store cards charge customers APRs of around 25%.
To put that into perspective: it's five times the Bank of England base rate, and roughly 8-10% higher than the standard rate charged by most credit cards!
Thanks to the outcry against store cards, some new regulations designed to help protect consumers came into force last year.
Unfortunately, store card providers haven't taken this as a signal that it's time to reduce their rates.
In fact, some have actually continued increasing the APRs on their store cards -- making borrowing on them even more expensive.
Outrageous APRs
I rounded up information on several store cards from Britain's best-known retailers -- and I think the numbers speak for themselves.
Store Card | Typical (Variable) APR | Recent Rate Increase? |
|---|---|---|
IKEA Home | 19.9% | Up 7% this summer |
Debenhams | 19.9% | Up 1% this summer |
Topshop | 19.9% | No |
Marks & Spencer | 23.9% | Up 4% this summer |
Oasis | 28.9% | Up 4% this month |
Karen Millen | 28.9% | Up 4% this month |
Principles | 28.9% | Up 4.3% this month |
Miss Selfridge | 29.9% | No |
Burton | 29.9% | No |
Dorothy Perkins | 29.9% | No |
AVERAGE | 26.0% | 2.43% |
Source: Data from Moneyfacts and retailers' websites.
As you can see, the interest rate you pay is more than 10 times higher than the discount you receive.
Even the `cheapest' store cards listed in my table charge higher APRs than most credit cards -- and the most expensive charge interest rates just shy of a staggering 30%!
Are all store cards evil?
I have to admit there's nothing inherently wrong with store cards with discounts and deals -- as long as you always pay off the balance of your card in full, before it starts accruing interest.
If you only pay off your store card a little at a time (perhaps by opting for the minimum monthly repayment), it will take you a very long time to clear your debt -- and any discount you originally got will be dwarfed in size by the amount of interest you have to pay.
In summary, I believe store cards are only a suitable choice for those who are very financially disciplined. But even in this situation, I think there's a better alternative.
Smarter ways to spend
If you're looking to buy now and pay later, the best way to spend is on a credit card which offers a 0% on new purchases deal.
Right now, the Capital One Platinum Card gives users a 0% on purchases period which lasts until 1 October 2009. For anyone in need of some breathing space to pay off what they buy this winter, I think this card is a great option.
Alternatively, those who don't need a 0% on purchases deal could benefit from using a cashback credit card. These cards pay you back a proportion of whatever you spend, no matter where you spend it -- which in my opinion, renders them instantly superior to retailer-specific store cards.
At the moment, the market-leading cashback credit card is the American Express Platinum Cash Back Card. It will pay you back 5% of whatever you spend during the first three months you use it (up to a maximum spend of £4,000). After this, you'll receive cashback of 0.5% on the first £3,500 you spend, 1% on £3,001 to £10,000, and 1.5% on spending above £10,001.
As with store cards, you'll need to pay off the balance of your cashback credit card in full, before it accrues interest -- otherwise the interest you're charged will outweigh the benefits on offer.
However, if you're able to do this, I think now is the perfect time to apply for the American Express cashback card: you'll be able to use it for any Christmas and January sales spending, which should ramp up the amount of cashback you earn.
Whichever option suits you, good luck with your seasonal spending -- and saving!
> Compare great-value credit cards at The Motley Fool.