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Tackling your debts

The dangers of store cards and online accounts - Parts 1 and 2

Posted 30 September 2015 by Christine Walsh

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Store cards and online accounts - here's what you need to know.

Yesterday, in part one of this blog, we discussed store cards and online shopping account debts, and how you might end up with them. Today, we'll look at why it can be an expensive way to borrow, why it's wise to avoid them, and what you can do to get them paid off as soon as possible. If you missed yesterday's post, you can read it below. Right, let's get on.  

An expensive way of borrowing

One of the main reasons why store cards can be dangerous is because they can be an expensive way of borrowing. Typical store card rates are around 29%, which is higher than many credit cards and personal loans. But, if you use store cards wisely, they can be a really good deal. Getting 10% or 20% off a purchase and then paying off the balance on your store card straight away means you’ve made a great saving and you’re not going to be charged any interest. Who wouldn’t want that?

But some struggle to manage the card and it ends up costing them money. This will happen if you use the card and then don’t pay the whole amount off before the interest starts being applied. If you simply use the card and pay off everything you owe on the date it becomes due, within the interest free period, you’ll pay nothing more than the purchase price. That’s how to use the card wisely!

Temptation

Another danger of store cards is temptation. You may find that once you’ve got the card for your favourite store, you’re tempted to visit more often. Once you’re in there, you know you’re going to see something you love and a card makes impulsive buying a breeze. Before you know it, you could find yourself in a situation where you’ve bought lots of items on credit, you’re not sure how you’re going to pay for them and the interest charges are higher than you expected. Not a good situation to be in, but it’s not time to panic just yet there are a couple of things you should check first.

 

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Check that you haven’t been mis-sold

First you may want to see if you were mis-sold the store card in the first place. Much has been made of the mis-selling of store cards, mostly due to the Payment Protection Insurance scandal that has shaken the financial world over the last few years.

Whilst the regulations are now a lot tighter, in the past shop assistants may have been asked to sell as many store cards as possible and were sometimes given bonuses for hitting a sales target. The problem was the shop assistants were not necessarily trained to check whether the person taking out the store card should be opening a line of credit.  Or whether it was a suitable product for them at all, given that they hadn’t even checked their credit history. Nowadays, any and all lenders have to carry out what’s called an affordability check, to make sure that you are in a position to be taking on credit. If you were to go into a store now and request a card then they would do a credit check just like a bank would if you were applying for a loan. They’d then tell you whether or not you’d been approved based on whether they thought it was responsible to lend to you. If you took your card out a few years ago and no credit check was carried out on you before you were given the card, then you could have been mis-sold.

As we said, in the past these store cards sometimes came with PPI attached. This is an insurance designed to cover the payments on your card if you fall ill or lose your job. In many cases it was added without the customers’ knowledge, and possibly without any checks being made as to its suitability, so you should check to see if you’ve been paying this without even realising.

If you have, and you didn’t know about it, want it or it wasn’t suitable for you, then you can make a complaint about this. Lenders are still putting money aside to refund people who were mis-sold PPI and if you do get a pay-out, you can use the money to pay off your debt. If you’re interested in making a complaint, have a look at the advice from the Financial Ombudsman Service.

Check who you really owe the money to

When you pay towards your store card you may not be paying who you think you’re paying. This is because store cards are very often supplied by large banks. For example you think you’re paying Dorothy Perkins but you’re actually paying Santander. Now, if you also bank with Santander, you may find that they try and get the money back by simply taking it out of your account.

Yes, they really can do that! And you don’t want to suddenly find that the money has been taken, leaving you short cash to pay your priority bills. So, what can you do? We’d suggest that you open another basic bank account with another bank entirely and keep some money safe in there.

Of course, we would always advise you to pay off any debt as quickly as you can.  But sometimes it’s just not possible, which means that interest and charges can start to add up, increasing your debt further. However, the consequences of missing a payment on a store card are not as serious as missing a payment on a loan secured on your house or your council tax, for example. So whatever happens always make sure you can cover these priority costs first. 

Put a plan in place

Problem debt needs to be addressed and one way you can do that is to have a look at your finances and put a budget in place. Once you don’t this, it’ll  tells you what you can spend on the different areas of your life, which helps you stay in control of your finances, but also allows you to show your lenders the effort you’re making to get your finances back on track. If you do this, they may be more willing to negotiate with you.  

If you don’t feel comfortable speaking to your lenders directly, you should think about getting some help. There’s lots of information on the Money Advice Service website, or you could talk to us about the debt help and solutions we have on offer. Send us an email or chat with us online or on the phone – we’re here to help!

See below for part 1. 

Part 1

When you think of unmanageable debt, do you think of not being able to make your repayments on payday loans or on your credit card? If you do, that’s normal. What you may not think about is what you owe on your store cards, if you have any that is! If you do, your favourite stores and online shops could be dangerous debt territory, if you don’t know what you’re doing. This three part blog gives you the low down on store cards, so you can stay in control. In part 1 we'll look at the differences between the various cards supplied by retailers and how easy it is to get tempted.   

Priority or not?

If you are struggling with problem debt it’s vital that you pay your priority debts first and, if you’re wondering whether store card debts are a priority, the answer is no. Store card debts are not considered priority debts, so if you have a owe money on a store card, and also have a secured loan that you need to repay, the secured loan takes priority, always!  This is because the loan is secured against your home, so you risk losing it if you fail to keep up the payments. Council tax and utility bills are other examples of priority bills that you should be putting first. But that doesn’t mean you can ignore what you owe on store cards and think it’s not important – it is. And if we look at what gets people into unmanageable debt in the first place, store cards can be a contributing factor.

Store cards, loyalty cards and store credit cards

So, just for clarity, let’s clear something up – after all the world of cards can be a confusing one! A store card works in a similar way to a credit card, but you can only use it in the shop or group of shops, that issues it. So, for example, a Next store card will allow you to buy now and pay later, like a credit card does, but only in Next.

And don’t confuse them with credit cards offered by some retailers (such as supermarkets), which may have different interest rates to store cards and can be used anywhere and function as normal credit cards.  

They are also different to loyalty cards. With loyalty cards you can’t usually pay for an item, but what you do get when you purchase goods or services is points, which will accumulate over time.  These are then converted in to other benefits, such as a discounts or free items further down the line.

Offers, offers, offers!

We are all love a special offer, it just depends what it is. And if your thing is grabbing the hottest trends on the catwalk, 10% off your latest fashion find could be so tempting you just can’t refuse. It seems that’s what happens to lots of people – they were in the store and the shop assistant told them about an introductory offer on that day. But, of course, you only qualify for the offer if you agree to take out a card there and then. Doesn’t leave you much time to think about it, does it? And this kind of sign-up to store cards doesn’t make it easy to read through the long and often complicated terms and conditions that come with the card. If you do want to take the card, just ask for the T&Cs and step to one side to read through them, before signing up.

However, don’t forget that all cards, no matter who supplies them, come with a 14 day cooling-off period too. So, if you’ve taken one out in the last 14 days and have now decided that you no longer need it, you can cancel it without any penalty.   

These kinds of deals can be very tempting indeed, because they’re designed that way. And, no matter how good your intentions are to start with, this kind of shopping can be the start of a slippery slope, if you aren’t careful. 

Come back tomorrow to find out more about store cards and online accounts and what you can do if your debt has become unmanagbable.   

 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.