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Most people think twice before taking out big loans for a house or car – but one of the most pervasive and concealed types of debt is sitting right in your wallet.
Store account cards are 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?
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.
It's also useful if you need to make large purchases, which you can then pay off later over a number of months. Plus, carrying a card is generally safer than carrying cash.
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 more stuff.
What are the dangers?
The interest rate on these cards is often higher than the average credit card –and you probably won’t be told the interest rate upfront. 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 with huge, unmanageable debt.
There may also be hidden costs, such as a “lost card protection” fee or a club membership you were not made aware of. Double-check the fine print!
How to use them wisely
• Before you sign up for a store account, read the fine print and find out exactly what interest you’ll be paying, and what additional costs you’ll be charged.
• 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. This may be a good idea as you can pay over more 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.
• 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 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, have a problem.
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. Contact Lyndsay on 021 447 7565 or visit www.GetSmarter.co.za for more information.
Do you consider your purchases carefully when you're buying with a store card? Have you thought about just closing the account - and why?
Store account cards are 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?
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.
It's also useful if you need to make large purchases, which you can then pay off later over a number of months. Plus, carrying a card is generally safer than carrying cash.
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 more stuff.
What are the dangers?
The interest rate on these cards is often higher than the average credit card –and you probably won’t be told the interest rate upfront. 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 with huge, unmanageable debt.
There may also be hidden costs, such as a “lost card protection” fee or a club membership you were not made aware of. Double-check the fine print!
How to use them wisely
• Before you sign up for a store account, read the fine print and find out exactly what interest you’ll be paying, and what additional costs you’ll be charged.
• 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. This may be a good idea as you can pay over more 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.
• 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 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, have a problem.
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. Contact Lyndsay on 021 447 7565 or visit www.GetSmarter.co.za for more information.
Do you consider your purchases carefully when you're buying with a store card? Have you thought about just closing the account - and why?
