The worst kind of Christmas cards

At this time of year, thousands of people take out store-cards. Find out why you shouldn't.

With less than a fortnight to go until Christmas, retailers are looking forward to bumper sales right up until Christmas Eve. Time for a festive carol (of sorts):

"Till bells ring, are you listening?

In the town, shoppers quickening.

A beautiful sight,

We're buying tonight,

Shopping in a winter wonderland."

Unsurprisingly, given the retail frenzy at this time of year, thousands of shoppers get talked into opening a store-card account. Although these appear to offer 'easy credit' to bargain hunters, they can become a trap for the unwary...

High-street robbery

Store cards have two huge drawbacks. First, they charge astronomical rates of interest on borrowing. Indeed, if you don't pay off your balance in full each month, then you could pay yearly interest rates of 30% APR or more. Second, the payment protection insurance (PPI) premiums charged by store cards are a disgrace, so just say no to this massively overpriced cover.

In order to show you how truly awful store cards are, I turned to the December issue of Moneyfacts magazine. Here's what I found (table sorted from highest to lowest APR):

28 awful store cards

Source: Moneyfacts, December 2009

Creation Account Card can be used in: adamskids, All Saints, Allders, Ann Harvey, Carphone Warehouse, Clarks, Contessa, Designer Room, Dolcis, Ernest Jones, Faith, Focus DIY, H Samuel, HMV, JJB Sports, La Senza, Leslie Davies, Littlewoods, mk one, Millets, Nevada Bob's, Peacocks, Pilot, Quiz, Robbs, Room, Sainsbury's, Selfridges, T J Hughes & Vergo Retail.

Edge Card can be used in: able2buy, Babies'r'us, Comet, Ernest Jones, Halfords, H Samuel, Holiday Time, Interflora, Mesh, Reid Furniture & Toys'r'us.

As you can see, the yearly interest rate charged by these 28 cards varies from 30.9% APR for the Creation Account Card to less than half that (15.3% APR; at upmarket department store Fortnum & Mason). Overall, the average APR is 25.5% APR, with 16 cards charging more than this average, and 12 charging less.

As you know, the Bank of England base rate currently stands at a 315-year low of 0.5% a year, so most store cards are charging between 51 and 62 times the base rate. Frankly, this is nothing short of high-street robbery.

Then again, store-card providers argue that their rates are reasonable, given the relatively low balances on store cards and the cost of providing incentives to customers. Then again, given these rip-off rates, why bother applying for a store card at all?

The main reason is to take advantage of cardholder offers, such as special events and offers, discounts and promotions, loyalty rewards, exclusive sale previews, invitations to customer evenings, and so on.

However, the value of these perks is doubtful when compared to the monthly interest of 2%+ which store cards charge. Thanks to interest alone, a typical store card will double your debt every three years, which is far too high a price to pay for loyalty.

Handle with care

By all means, have a store card, but please use it sensibly. Take full advantage of any introductory and ongoing discounts, but avoid interest by repaying every monthly bill in full.

(For example, I once bought an entire wedding outfit -- suit, shirt, tie and shoes -- from Austin Reed, costing over £500. By getting an Austin Reed card, I saved more than £100 (20%) that day. Later, when my bill arrived, I repaid it in full and have barely used this card since.)

Finally, if you're paying too much interest on your plastic debts, or you want to enjoy interest-free credit lasting up to a year, then read The best credit cards for Christmas. Switch to a Best buy credit card now and you could pay hundreds of pounds less in interest next year...

More: Ditch your store card for a top credit card | The eight biggest Christmas cons | Earn £200+ while you shop