Store cards: The danger of rising debt

We discuss the benefits and dangers of having shopping accounts.

Store account cards are, simply put, credit cards that can only be used at one particular shop or chain. With a store card, you can take home your purchase and only pay for it later. It also means that there is interest charged on outstanding debt, and you may end up paying more for your purchase than the price on the label.

It is important to distinguish between store cards and loyalty cards. The latter cannot be used to make purchases; they simply give you points for your purchases. These points add up to earn you “rewards”, usually in the form of vouchers.

What are they good for?
Having an account can be very helpful when you need to make large purchases, allowing you to pay them off in instalments over a number of months. Additionally, carrying a card is generally safer than carrying cash.
One reason many people open a store account is that it is an easy way to improve their credit rating, making it easier to get a bank loan or bond later on.
Some cards can be used at several chains of stores that all fall under the same group. This means that with one card you may be able to buy clothing, homeware, sport equipment, jewellery, stationery or any number of other things.

What are the dangers?
The interest rate on these cards is usually very high, often higher than the average credit card – and you probably won’t be told the interest rate upfront. As with a credit card, if you don’t pay the minimum required instalment each month, you get charged interest on the full amount owed. You may end up being charged interest on interest, leaving you will a huge, unmanageable debt.
Failure to pay your accounts within a certain period of time could lead to a negative impact on your credit record, or the business taking legal action against you.
There may also be hidden costs, such as a “lost card protection” fee or a club membership you were not made aware of. While the National Credit Act of 2007 makes it imperative for businesses to be clear about any additional charges, they usually do this only in the fine print.
One of the inherent problems of these cards is that, unlike credit cards, they are often offered by salespeople who are not specifically trained to sell financial services. If salespeople don’t fully understand the potential consequences of opening an account, how can they adequately advise customers as to whether the account is a good idea for them?

How to use them 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.
• 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. Ignore tempting offers from shops you wouldn’t normally shop at.
• 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.
• Be honest with yourself about what you are spending. Your combined monthly debt repayments should come to no more than 20% of your net income. If you are paying more than that, you may have a problem. An interesting exercise is to work out the amount of interest you have paid to your favourite chain since getting your account. You might be shocked at what you discover! 

Learn how to look after your finances with the part-time University of Cape Town Personal Financial Management short-course, presented online throughout South Africa. The course starts on 26 November 2012. For more information contact Nikki on 021 447 7565 or email Nicole@getsmarter.co.za. Alternatively, visit: www.GetSmarter.co.za