4 reasons to steer clear of store credit cards

By Emma Lunn

If you've shopped at a major retail chain, you've probably been offered a store card -- and incentives for opening one -- at the till.

Store cards are credit cards tied to a particular store or chain of shops. In addition to offering credit, a store card may make you eligible for future special offers or discounts. Yet despite the perks, they are generally a bad option for borrowers.  Here's why.

1. High interest rates
Store cards typically come with much higher interest rates than normal credit cards do. The Debenhams store card, for example, comes with an APR of between 19.9% and 29.9%.

"The majority of store cards charge interest of between 27.9% and 29.9% APR, more than 10% higher than the average credit card APR rate of 17.6%," says Andrew Hagger, personal finance analyst from MoneyComms.co.uk.

On the wider market, there are much better rates available. For example, the NatWest Platinum MasterCard is interest-free for purchases for the first six months -- and interest-free for balance transfers for 22 months. After that, the card reverts to an APR of 17.9%.

If you have good credit, there are also cards with lower-than-average interest rates -- like Sainsbury's Low Rate MasterCard at 6.9% and Barclaycard Platinum Simplicity Visa at 7.9%. store-cards

2. Rewards not worthwhile
In the past, stores often lured shoppers in with immediate discounts on their purchases if they signed up for a store card at the till -- typically 10% off of whatever they were buying, a tempting offer for large purchases.

But new government rules introduced in February 2012 mean offers such as free gifts or discount vouchers are not available for the first seven days after a card has been taken out.

Store cards still offer vouchers and discounts to be used later on, but these are rarely worth the higher interest rates unless you pay your balance off in full every month.

For example, the Topshop card gives users a £5 voucher to be used on a purchase of £50 or more and a 15% off voucher with the cardholder's first statement to be used on a purchase of £80 or more. But the card's APR of 19.9% could cancel out those savingsif you carry a balance.

3. You can use them only in certain shops
A key issue with store cards is that you can usually use them only in a certain shop or chain of shops. Regular credit cards, on the other hand, can be used almost anywhere the card's logo (usually Mastercard or Visa) is displayed.

By tying you to a certain shop or chain in exchange for discounts, the company could actually be costing you money.

For example, if you have a Topshop store card, you might head straight to Topshop next time you want to buy a pair of jeans instead of comparison shopping for better prices. If you did compare prices elsewhere, you might have found that Topshop's prices were more expensive, even after a store card discount is taken into account.

4. The impact on your credit score
When you take out a store card, you have to fill in an application form, and a credit search will be done. However, sales assistants don't always tell people about the credit search and how this can affect their credit rating.

If you take out several store cards, you will have a lot of available credit, and that could be a bad thing if you later want to apply for a loan or mortgage. The more credit you have, the further into debt you can go, meaning you may look risky to lenders. It will look even worse if you carry high balances on these cards.

"Some people may have up to half a dozen or more store cards that they don't use but are unaware how this can impact their credit status," Hagger says. "If you apply for new finance, the prospective new lender will see from your credit record that you already have access to thousands of pounds of credit via these cards (even though you may not be using it), and this may influence their decision whether to sanction further credit."

See related: Is the Asda cash-back card a good deal?, Are charity cards the best way to give back?

Published: 10 October 2012