Store credit cards can be an attractive method of buying from your favorite stores, especially when you do not have ready cash. Conditions vary from card to card, but they often offer no annual fees, interest-free periods and attractive store offers, such as free gift wrapping or special promotions. Store cards can be a good option if you pay the amount off in full within the interest-free period.
But if you cannot pay the full amount a store card is not a good idea. A typical store card charges around 19.8% interest, compared with a credit card which charges on average 13.5 %. For people who are not good at restraining their spending or credit use, store cards can be a debt trap. Like credit cards, you can be bankrupted for being unable to pay store card debt. Bankruptcy can ruin your credit rating, making it very difficult for you to borrow any money.
If you do not think you can pay off your store card within the interest-free period, you are better off with a traditional card, cash or a debit card. However there are strategies that can help to minimize the risk of using store cards. One of the most important is not to have too many. Too many cards could hurt your credit rating. But you should not cancel a store card just before applying for a mortgage or car loan, as this can affect your debt-to-credit ratio, which is something that lenders consider.
You should only have cards with the stores you shop at most often. Also look at their deals and promotions, and go with the ones that suit you the most. For example, a store might give a 10 % discount on a purchase for signing up to the card. It is probably better to do it on a large purchase, such as $2,000. You should also find out if the interest-free period begins at the end of the sign-up promotion. Know when the interest-free period begins and ends, and what the interest rate will be after the end of this period.
Look also very carefully at the policies of the card and do not sign up unless you understand the terms and conditions attached to the card. Get legal advice first if necessary. You need to be aware of the store’s default policy. If you default on your payments the store could raise the interest rate you have to pay. There may also be penalties for late payment. As part of a store card contract you may be offered Payment Protection Insurance (PPI). You need to carefully weigh up the costs and benefits of taking up any insurance.
Before signing up to a store card, think carefully. Maybe you might be better off saving for a large purchase. Do not allow aggressive sales staff to push you into signing on the spot. Take the agreement away and read it carefully. You should only sign if you are absolutely sure.