The Devil's Debt!

All but two of the UK's 32 different store cards charge sky-high interest rates. This exclusive survey exposes the great store-card swindle.

When it comes to borrowing money, I nominate store cards as "the crack cocaine of credit"!

Indeed, in September 2005, the Competition Commission announced that the store-card market was unfair and anti-competitive, leading to higher interest rates than fair competition would support. Later, in December, the Commission announced several remedies to improve the promotion and marketing of store cards.

The Commission recommended that interest rates (annual percentage rates, or APRs) should be shown prominently on statements, together with a 'wealth warning' about how expensive debts can be, and full information on late-payment and insurance charges. Also, from early 2007, cards which charge over 25% APR must display a special warning about their sky-high interest rates.

In the meantime, store cards continue to be one of the UK's biggest financial scams, as my latest research reveals. In an exclusive survey for The Motley Fool, I checked the interest rates charged by all thirty-two store cards available in the UK, using data from the July edition of Moneyfacts magazine.

(If you'd like to see the rates charged by your store cards, please check the table at the end of this article.)

Here's what I found:

• The average interest rate on a credit card is 15.6% APR, yet only two store cards charge rates lower than this: IKEA Home (12.9% APR) and Fortnum & Mason (15.3% APR).
  
  
• Seven cards charge APRs of 17.9% to 19.9%.
  
  
• Four cards charge APRs of 21.9% to 26.8%.
  
  
• Nine cards charge APRs of 27% to 29.3%.
  
  
• Of the remaining ten cards, nine charge 29.9% APR and one, the Creation Account Card, charges 31.9%.

Overall, the average APR charged by a store card (for payments other than by Direct Debit) is -- brace yourself -- 25.5% APR. Astonishingly, this is twenty-one percentage points higher than the Bank of England's base rate, currently 4.5% a year. Frankly, Shylock (the money-lender from Shakespeare's The Merchant of Venice) would be embarrassed to lend at these rip-off rates!

What's more, the swindle doesn't stop there, because store-card issuers also massively overcharge cardholders for payment protection insurance, plus they levy heavy fines for late or missed payments, exceeding your credit limit, etc. All in all, a store card is one of the most toxic financial products around. In fact, the Competition Commission calculated that store-card issuers are making excess profits of £100 million a year from overcharging for finance and insurance.

So, by all means open a store-card account in order to take advantage of introductory discounts, special offers, previews and promotions. However, ensure that you always pay off your monthly bill in full; otherwise you'll be taken to the proverbial cleaners. If you can't do this, you'll be better off with a credit card which doesn't charge interest on purchases for up to a year, such as these beauties.

Finally, if you owe money on an existing store card or expensive credit card, avoid paying interest for up to a year by transferring your balances to a 0% credit card. You can learn how to play this game in How To Master Your Credit Cards.

More: Use the Fool to compare credit cards, compare personal loans and compare savings accounts!

HOW EXPENSIVE IS YOUR STORE CARD?