You arrive at the checkout to pay for your purchases and the cashier offers you a store card. “No thank you.” you reply politely. But here comes the sales trap: “But you could save 20% on today's purchases... and 10% on all spending for the next three months... as well as receiving this free gift!” Is this a familiar scenario? And have you been persuaded to take on another persuaded wallet-sized rectangle of plastic?
Store cards are very similar to credit cards as they operate by allowing you to borrow money, but this credit can only be spent in a particular store. Unlike loyalty cards, however, store cards are not designed to award you fidelity points. As a form of personal loan, they accumulate interest and are designed to ensure that you shop only in the named store.
Store cards also come with a much higher price tag than credit cards. Around two thirds of the major store cards currently offered in the UK charge interest rates of more than 25% APR; quite an extraordinary rate. It would seem logical that shopping in that particular store would become cheaper for customers holding a store card, but in fact the opposite can often be true. Plus, signing up to multiple store cards could have an adverse effect on your credit rating.
It is clear, therefore, that there is a definite advantage to paying off store cards as quickly as possible. If you find yourself with multiple store card balances to pay then the ideal scenario would be to pay them off in full. If you choose to do this then it is wise to start with the smallest balance first, making the maximum payments you can afford, whilst making the minimum repayments on the other cards you have, until the debt on the card with the smallest balance is repaid in full. Simply repeat this process with your other store cards. There is a good reason for starting with the smallest balance first; getting out of debt is about changing your mind-set with regards to debt and slogging away at the biggest balance will only lead to discouragement. Starting with the smallest and having a “one down, x amount to go” attitude will refuel your enthusiasm and keep you motivated.
In some cases, such as when the interest rates are crippling your ability to pay back, simply paying off your debt slowly over time is not an option. Other possibilities exist though. One is to take out a credit card with an introductory interest free period and transfer your store card balances to this card. This awards you several months where no interest will be added to the amount that you owe. Another option is a debt consolidation loan: This is where a company essentially pays off your store cards debts and offers you a payment plan with them at much lower rate of interest.
In essence, paying off store cards is a necessary evil. Once completed, however, the sense of freedom from debt is priceless. Even if the process of paying off these loans one by one takes longer than anticipated, do not give up. There is only one way out of store card debt, and one day you will be glad that you made the commitment to be debt free once and for all.
Amy Henderson writes financial advice on behalf of Norton Finance