Store cards: An appraisal

Try leaving a high street shop these days without being asked if you would like a store card. Some assistants ask you outright. Others try to seduce you with lines like 'Would you like to save 10% on your purchases today?'

If you say yes then you will need to spend quite a bit of time filling in a wad of applications forms. Ever seen the poor souls at the end of the cash desk doing that - just before the shop assistant shouts their personal details down a phone to the credit checkers? You will also need deep pockets. Because the interest rates on store cards are shocking.

Shop of horrors

Government watchdog the Office of Fair Trading (OFT) agrees. It has just completed research into the store card market and its findings are stark. For starters, most store cards have an interest rate (annual percentage rate or APR) of at least 10% more than most credit cards. The OFT is concerned that consumers find it difficult to assess the costs and benefits of using store cards, saying: 'There is a lack of transparency at all stages of the process of providing consumer credit through store cards – before signing, at point of sale and post-contract.'

For example, during the mystery shopping exercise carried out as part of the study, the OFT found that only 23% of shoppers were offered the opportunity to take that dreaded application form away with them. Of the remainder, three quarters had the request to do so refused. Also, information on the interest rate was not available in about a third of cases and 40% of the mystery shoppers felt that the information provided was inadequate.

The rate rip-off

Apparently, one in three adults has a store card but only two thirds pay off the balance each month. This is where the trouble starts. Carrying a balance on your store card is the quickest way to get into debt. So let's see how store card interest rates compare with credit cards. At the time of writing the independent 'best buy' tables from Moneyfacts reveal that IKEA's card charges 12.9% and the John Lewis card, 13%. But then there is a huge leap to Marks & Spencer Money at 18.9%. The APR for the Argos card has come down from 25.9% to 18.9% in the last year. BHS and Habitat cards both carry rates of 29%. Burton and Monsoon have an outrageous 29.9%. Put £250 on a high rate store card and if you pay back just the minimum each month you could end up owing nearly as much interest as you paid out in the first place.

In contrast, there are hundreds of credit cards available with a 0% introductory rate. Even the standard interest rates on credit cards are still a fraction of the store card rates. Capital One offers 6.9%, Northern Rock's rate is 9.1% and HSBC offers 9.9%.

On uncleared balances over the course of a year, this means that for every £100 you spend on your Habitat store card, you pay £29 of interest. With the HSBC card, for example, you would pay £9.99. Alternatively you can pay almost nothing at all on an interest free introductory rate - most of which last for nine months.

It's no wonder that the store card market is worth £4.8 billion.

Under investigation

The OFT has passed its findings to the Competition Commission for further investigation. It is also launching an education campaign to help make store card deals clearer for customers, so that they know what they are getting into.

Michael Senior, head of personal loans and credit cards for The MarketPlace at Bradford & Bingley says, ‘We welcome the investigation into store cards which have, until now, been free to charge exorbitant rates of up to 30%, often hidden in lengthy terms and conditions. This can cause immense confusion for customers.'

‘Retailers and store card suppliers have been getting away with overcharging and failing to provide customers with clear information for far too long,' says Claire Whyley, credit expert at the National Consumer Council. 'It's high time they put their house in order. As most people don't understand APRs, we especially welcome the proposed consumer education campaign,' she added.

Despite their bad reputation, one third of adults hold store cards, and while 62% of them pay the balance off each month, a third of them keep their debt going, paying off a little each time the bill comes through, at great expense. If you have succumbed to a store card and cannot pay off the balance in full straight away then pay off as much as you can afford. Making payments via Direct Debit may also save you money as many store cards offer a discount for this method.

Top tips:

•  Before signing up for a store card, consider your options – do you have alternative forms of credit available and would they better suit your needs?

•  Check what the APR on the store card is – especially if you don't plan to pay off your balance every month; a high APR could outweigh the benefits of an initial discount.

•  Don't sign anything until you've considered it carefully – take the form away with you to consider if you're uncertain.

•  Store cardholders can enjoy exclusive benefits such as loyalty schemes, discounts, special preview evenings and early access to sale stock. If you really can't resist then the trick is to only spend what you can afford and pay the bill in full each month. That way you can make sure your cardholder privileges are genuinely free.