Store Cards Costing Customers More in Interest
At a time when more shoppers are trying to decide how to stretch their money, one seemingly obvious decision is reducing the amount paid each month on credit and store cards. What not everyone realizes, however, is that making minimum payments means interest is paid first and the debt itself doesn't get very much smaller.
Julian Knight, in the UK newspaper The Independent, examined store cards and pronounced them "a very expensive way to shop." Although he agreed that they may seem convenient at the till, he quotes Michelle Slade of financial information firm Moneyfacts, who says that "The combination of high interest rates - up to 30 percent - and the requirement only to make a monthly repayment of four percent or less of the balance outstanding means that even relatively small debts can hang around for 15 years or more."
According to Moneyfacts, store card interest rates - already more than three times the level of the 'best buy' credit cards - are also set to rise further. Mr. Knight explains that experts attribute this both to banks operating the cards and retailers needing to maximize profits during the current economic squeeze.
David Kuo, of financial advice website Fool.co.uk, told him that banks are getting to charge more in interest in exchange for giving retailers the credit they need to maintain stock levels.
Card issuers make their profits when customers pay only the minimum necessary. Moneyfacts' sums demonstrated that customers can end up paying more in interest than they initially spent.
All this is in spite of a Competition Commission decision last year that card providers must be more transparent about interest rates exceeding 25 percent so that consumers are aware of what will happen if they stick to minimum payments.
Edward Simpson of the Finance and Leasing Association (FLA), which represents the store card industry, maintains that the Commission's instructions have ensured that customers are getting a fairer deal than in the past with more transparent rates. He also pointed out that "the actual level of debt on these store cards is actually quite small compared with credit cards, loans and mortgages, and the average sum owed by customers is only £156."
Discussion Questions: How do you think the U.S. financial crisis will impact store credit cards? Will interest rates on store cards increase? Will consumers cut back on using store cards?