Store cards: why punish yourself?

They charge sky-high rates of interest but British shoppers can't get enough of them. Resist the temptation, writes Melanie Bien

Massive rates of interest, it seems, aren't enough to deter customers from taking out store cards. House of Fraser is expected to announce that its own card is turning a profit - much sooner than expected - at its half-year results at the end of the month.

Although most store cards come with an annual percentage rate (APR) of around 30, the market is worth £4.8bn, proving that customers can't get enough of them. Nearly one third of adults in the UK own one, and more than a third of these fail to clear their balance every month. At the end of 2002, outstanding balances on store cards totalled £2.5bn.

Most people take one out because they are tempted by the discount on their first purchase, usually 10 per cent. Store cards also offer perks for regular use, such as money-off vouchers, sale previews and promotions.

But if you don't clear your balance when the bill arrives, these incentives pale into insignificance. The problem is that few sales assistants bother to draw your attention to the whopping interest on the card when they encourage you to apply for one. There is also some pressure involved, as you aren't allowed to take the form away with you to consider at your leisure whether or not to apply.

Six out of 10 people with store cards are unaware of the APR on their plastic, according to research from Sainsbury's Bank. More than half a million of us have over £1,000 left on them at the end of the month, and 92,000 consumers have over £5,000, the bank found.

This is ominous, given that a Creation Account card - available in Dolcis, HMV, Miss Selfridge and Warehouse, among others - has an APR of 30.9. Other retailers are also guilty of high charges: Country Casuals, Kwik-Fit and Russell & Bromley charge APRs of 30.7.

House of Fraser's store card is one of the most successful in the country, with more than one million customers. Up to a third of all transactions in the store are made using the card, and the type of customer House of Fraser attracts means few default on their repayments. Yet the rate of interest - at 29.3 per cent - is one of the highest.

Not all retailers impose sky-high rates, however. The John Lewis Partnership, which owns both the department store and the Waitrose supermarket chain, charges a standard APR of 13 on its card. There is even an intro- ductory offer of 6.5 per cent for the first six months - previously unheard-of among store cards.

The Ikea furnishings chain has halved its store card rate to 12.9 per cent. The next cheapest rates are 15.3 per cent (Fortnum & Mason) and 18.9 per cent (Liberty and Marks & Spencer Money).

Store cards represent lucrative business for retailers because of customer loyalty. However, the Competition Commission is now conducting an inquiry into the market.

Earlier this year, the Treasury Select Committee attacked store card providers for their sales practices and high interest rates. The Office of Fair Trading also reported that customers aren't given enough information about the deals they sign up to.

Part of the problem is thought to be the influence wielded by a limited number of finance companies. The US firm GE Consumer Finance controls about half the UK's store cards, including those offered by Top Shop, Bhs and Debenhams.

However, the company denies that this is a problem. It plans to increase transparency by including summary boxes on statements, with details of the cards' APRs and charges.

In the meantime, you would be wise to resist the discount on offer at the till, tempting you to take out a store card - unless you can clear the balance when the statement arrives. If you can afford only the minimum payment, you will be stung with high interest charges and would be better off using a cheap credit card offering 0 per cent on new purchases for an introductory period.

If you have run up debts on a store card, you should also switch these to a credit card charging 0 per cent on balance transfers for several months. Virgin Money is offering 0 per cent for nine months. If you haven't paid back what you owe by then, switch again to another "0 per cent" card.