Cards store up trouble
MILLIONS of cash-strapped Britons are turning to credit to help them survive the Covid-19 pandemic, only to discover that affordable borrowing is getting harder to access as lenders pull their best deals.
The average person now owes £539 more than a year ago, according to
The Money Charity – and that figure looks set to grow.
Banks are retreating from riskier lending as job losses and debt fears mount and one in three say affordable loans have become “inaccessible”, according to a new study from free credit-report provider Credit Karma.
As credit dries up, more than five million people are turning to store cards to fund their spending, despite the higher costs compared to longer-term borrowing products such as personal loans.
Of these, almost four in 10 were lured in by introductory offers, while 25 per cent said that they wanted to treat themselves after lockdown.
Yet a third are concerned about making repayments, and the situation will get worse when payment holidays and furlough schemes end on October 31.
Akansha Nath, head of partnerships at Credit Karma, warned to think carefully before entering into any borrowing
agreement, as missed payments could trigger penalty charges and inflict longterm damage on your credit score: “While store cards may offer a quick way to access credit, they can prove more expensive than credit cards and personal loans in the longer run.”
Reading the terms and conditions may seem boring, she said, but you must understand what you are signing to avoid getting stung.
“Store cards can come with appealing introductory offers, decent discounts and VIP member perks, but look carefully at the interest,” Nath said.
Store cards typically charge APRS of around 29.9 per cent a year, compared to credit cards at 20 per cent, while Cahoot and TSB offer personal loans starting at
2.8 per cent, although this may depend on your credit record.
While some store cards offer 56 days interest-free credit on purchases, others offer no grace period at all, so you will start running up interest straight away.
Moneycomms personal finance expert Andrew Hagger said you should never sign up for store credit to buy non-essential items: “If you don’t really need it, it is not worth getting into debt.”
It can make sense to take a store card when making a large purchase, to grab the 10 per cent discount many retailers offer on your first spend, but Hagger warned: “Make sure you can repay the debt in full that month, otherwise interest charges will soon wipe out the discount.”
He advised against making multiple applications for credit as these will show up on credit agency reports, alerting lenders that you have difficulties: “Sign up to a service such as Totallymoney.com, which will show which credit cards and loans you are most likely to get, based on your credit rating.”
Introductory balance transfer credit card deals are disappearing fast, according to financial information business Defaqto, down by almost a third over the last year.
The longest balance transfer deal is for 29 months, down from 34 months two years ago.
Defaqto banking expert Katie Brain said: “It may be cheaper to consolidate debt of more than £7,500 on to an unsecured personal loan.”