Store card providers which charge 25 per cent or more in interest will soon have to give ‘wealth warnings’ to cardholders about their charges – and admit that credit may be cheaper elsewhere.
Companies will also have to state that consumers have the option of paying by direct debit, so they can avoid being charged interest over a missed payment.
The measures were announced today by the Competition Commission (CC), following its investigation into the store card market. It found that customers were being overcharged by at least GBP 55 million a year for credit and associated insurance.
Currently there are more than 11 million store cardholders, and outstanding balances top GBP 2 billion.
Expensive way to borrow
Which? has long warned about the high interest rates on many store cards. We believe they are an unneccesary and expensive way to borrow. While we’re pleased that charges will be highlighted on statements, we think that costs should be made clearer before consumers sign up in stores. Which? believes the CC has missed the point by concentrating on a card’s interest rate.
Which? Head of Money Research, Ashleye Gunn, said: ‘We’re disappointed that the Competition Commission has missed the opportunity to ensure that stores give prominent information about the interest rate when the card is taken out, and also allow customers to take the application form away to consider the offer.
‘Our previous research on ten of the biggest store card providers found that shop assistants didn’t fully understand basic financial details such as the interest rate, and some didn’t let customers take the application form away, putting pressure on to sign up there and then.
‘It is the sales process that needs most attention so consumers know what they’re getting in to. Many of the shop sales staff who sell store cards have little understanding of the financial details and yet can be incentivised for each sale. This leaves consumers in danger of being badly advised and ending up with a very expensive high interest product that they don’t need. We would advise people to just avoid store cards at all costs and choose a cheap-rate credit card instead,’ said Ashleye.
‘We also think that the Competition Commission has been too generous to card companies in setting the start point for a warning on statements that ‘cheaper credit may be available elsewhere’ at 25 per cent. The average credit card rate is around 15 per cent, with Which? Best Buys below 10 per cent.’
Large high street chains charge sky-high rates for their cards. For instance, Top Shop’s card rate is 29.9 per cent and House of Fraser’s is 29.3 per cent. But if you change to a Best Buy credit card rates are as low as 6.9 per cent.
The CC probe found that many store card interest rates were around 30 per cent – between 10 and 20 per cent higher than they should have been if they reflected costs.
A better deal
The watchdog said it will now become mandatory for the current APR, an estimate of interest payable next month and a ‘wealth warning’ of the consequences of failing to make a payment to be prominently displayed on the front page of statements.
The same page will also have to include a warning that the interest ‘may be higher than on other sources of credit’ and that it ‘may be costly…to leave balances owing on your account after the interest free period’. </p>
The measures are expected to come into force in 12 months. CC Deputy Chairman Christopher Clarke, who chaired the inquiry, said he hoped the changes would make the market more competitive and ensure consumers got a better deal.
He said: ‘Many store card programs have APRs clustered around 30 per cent and we have found that there has been little competitive pressure to reduce them. Even though lower APRs have recently been, or are being, introduced for some store card programs, even by the end of 2006 more than 90 per cent of store card accounts are projected to continue to pay APRs of more than 25 per cent.’