Don’t get stuck in the store credit card debt trap

While retail credit cards will help you build a credit profile, they're not always the best idea if you're not careful

It’s not surprising that in the economy we currently find ourselves in, the temptation to sign up for one or a couple of the host of retail store cards that are virtually thrown at you from all angles, is dangerously high.

The latest TransUnion Consumer Credit Index (CCI) released in August shows that consumer credit health improved slightly in the second quarter from the first quarter which fell to a three-year low, but that distressed borrowing in the form of revolving credit in credit or retail store cards rose by 2% year-on-year in the second quarter of the year – indicating that more and more households are accessing credit to maintain their living standards.

“During challenging economic times these households often utilise revolving credit via store cards and credits cards to augment their disposable income. The fact that these households need to access credit to maintain living standards could be an indication that South Africans continue to live beyond their means,” says ETM Analytics economist Russell Lamberti.

But the problem with relying on credit from store cards is the exorbitant interest rates that are charged on retail credit cards versus normal credit cards from financial institution.

READ MORE: More South Africans are relying on revolving credit

Make sure that you take the time to read the fine print to avoid nasty surprises at the end of the month because what a lot of consumers aren’t always aware of is the fact that the interest charged on retail credit cards can be up to 10% more than a normal credit card. And over time this means you could easily end up paying twice as much once you’re done paying it off.

“The interest rate is where the danger lies, but also the amounts you spend. For example if you have two lots of debt staring you in the face each month: R20 000 on a credit card at 17%per annum and R7000 on store credit at 21% per annum most people would think to pay off the larger one over a long period they would think they’re coming out on top,” notes LoanFinder SA.

“Sadly this is not the case. The smaller, higher interest debt is actually the more dangerous one. Growing at a faster rate than the larger debt, the compound damage it can cause over a long period of time is far greater. In this case, you should pay off the store card as soon as possible, while still servicing the lower interest on the credit card.”

Matt Schulz (corr), a senior industry analyst from creditcards.com, warns consumers to really interrogate offers that appear to be too good to be true because in almost all cases. it is.

Another area to be aware of is an offer of zero interest during introductory periods. What is important to remember is that you will need to pay off the full balance due within the stipulated period of days in order to benefit from the zero interest offering.

READ MORE: Many middle-aged South Africans are dead broke

“It can be a tempting thing because of those discounts. Don’t make the decision right then,” he advises. “Take the brochure and read up and chances are all the perks will still be there, but you’ll make a more informed decision.

How to use store cards wisely:
• Do your research. Before you sign up for a store account, read the small print and find out exactly what interest you’ll be paying, and what additional costs you’ll be charged. Some of these extras may be optional – be assertive about what you need and what you don’t.
• Some stores offer a “six months interest free” option where, provided you make your payments on time and pay off the total debt within six months, you won’t be charged interest. Such an account may be a good idea as you’ll have the benefit of extended payment time, and you’ll still only be paying the cash price. A good rule is: don’t get an account that doesn’t have an interest-free option, and don’t buy anything that you can’t afford to pay off within the interest-free period.

READ MORE: Tips for stretching your rand

• Don’t fall for marketing hype. Often a card will be offered along with vouchers or a discount for your first purchase. But even if you get an initial discount, you will still have to pay off the balance at whatever interest rate is charged.
• Try to pay more than the minimum required instalment each month – especially if you have an account that charges interest. By paying as much as possible each time, you will pay off your debt faster and therefore pay less interest.