'Buy now, pay later' offers can leave you with debt headache

By Michael Lloyd

Signing up for catalogue accounts or store cards to grab discounts can seem like a great way of saving money, but getting sucked into using these "buy now, pay later" credit products can also lead to serious debt problems.

"Buy now, pay later" lenders are everywhere, most often in the form of store cards and catalogues. And they often try to lure you in by offering a decent discount on first purchases. If you're planning on spending money on a big-ticket item, such as a high-end laptop or smart TV, 20% off for opening a credit account can be a big draw.

But many of these store cards and catalogue accounts charge interest rates that dwarf those levied by standard credit cards, negating any discounts you receive. In the end you may pay more than if you had bought the item with cash or a traditional credit card.

buy-now-pay-later-trap

Accounts in good and bad standing can cause debt problems
If you miss payments on a store card or catalogue account, the lender, of course, will have the same rights as a traditional lender to pursue you for the money you owe.

However, many people start to experience problems with these types of products even if they are able to keep their accounts in good order, thanks to interest; some catalogue companies target hard-up consumers with pricing models that cost them more than three times a product's face value.

In 2014, more than one in 10 callers to National Debtline reported dealing with catalogue debts, according to a National Debtline spokeswoman. According to January 2015 research for the Debt Advisory Centre, one in
five people who shop with store cards or through catalogues are behind on payments.

"Store cards, catalogues and other forms of 'buy now, pay later' credit
come with high fees and charges, and can be an extremely expensive way to borrow," says  Jane Tully, head of insight and engagement with the Money Advice Trust, the charity that runs National Debtline. "It is crucial that store card providers and catalogue companies act responsibly and be as clear as possible in their terms when offering these credit products to consumers, and to assess whether they will be able to afford to meet their repayments. The checkout should never be a place for the hard-sell when it comes to credit."

Avoid getting stung
If you're considering signing up for this type of account, here are some tips to avoid getting stung:

  • If the discount is too good to pass up, make sure you can afford the item without the store card. Then, sign up for the store card, get your discount, and pay off the balance immediately to avoid interest.
  • Many store card issuers charge a dormancy fee if an account isn't used for a certain period of time. If you opened the account solely to take advantage of a discount offer, close it as soon as you've paid it off.
  • Make sure you know how much interest you'll be charged if you do carry a balance. Many store cards hit people with interest rates of around 30%, while some catalogue firms charge more than double this figure.

  • As with regular credit cards, applying for multiple store cards or catalogue accounts over a short period can damage your credit score.
  • Think carefully before agreeing to extend your repayment period. Some catalogue companies offer their customers more time to pay in exchange for a higher rate of interest.
  • Never use your store card to borrow cash. Some store card accounts allow customers to take out cash advances, which often accrue at an even higher rate of interest than what you would pay on purchases.
  • If you have a large amount of outstanding store card or catalogue debt, consider using a balance transfer card to pay it off with zero to little interest.

"If you are offered 'buy now, pay later' credit, it is important to act as a critical consumer and consider whether you will still be able to meet the payments, should your circumstances change," Tully says.

Consumers who are experiencing difficulties with store cards or catalogue accounts should contact a non-profit debt counselling service such as National Debtline, StepChange or PayPlan.

See related: Don't let nontraditional loans lure you to debt, Remedying credit card purchase remorse

Updated: 23 November 2016