Sometimes things are just simply too good to be true. You kind of know, deep down inside, that this might not be a good idea but you struggle to let go. Store Credit is one of these struggles.
A growing trend in South Africa with big retailers stepping into the financial services industry, offering “amazing” deals on items bought on credit.
The fact that big businesses such as Makro and Game are now essentially offering credit card-style purchases on their store cards is nothing new. Financial institutions aren’t the only ones who can play in this arena.
Car companies have been doing it for years - offering financial packages that help you buy your car over a period of time. The same concept applies here, except instead of a car you’re buying a toaster.
When it comes to credit and interest it’s the little things that snowball and end up becoming a problem. The idea of buying something from a store on credit sounds brilliant – how else could a normal consumer afford a R20000 top of the range laptop? The major issue arises when you look at the interest rates offered.
Just a quick look through the latest Makro and Game promotional pages in my local broadsheet sheds light on how easy it is to end up in serious financial trouble. At the bottom, in very small print, they explain their interest rates. A normal credit card charges you somewhere in the high-teens per annum on money you borrow. High, but understandable with all the perks you generally get with a credit card.
Store credit is somewhat higher. Both Game and Makro indicate a 23.2% interest rate per annum (p/a), a good 5 or 6% higher than most credit cards. If you exclude the usual 3-6 month interest free period you get with most credit cards, the numbers begin to stack up. Comparing it to the prime interest rate, which is currently at 9.25% per annum, it’s quite a step up.
The interest rate is where the danger lies, but also the amounts you spend. For example: If you have two lots of debt staring you in the face each month: R20 000 on a credit card at 17% p/a and R7000 on store credit at 23.2% p/a, most people would think to pay off the larger debt first. By purely servicing the interest on the smaller amount and reducing the larger one over a long period they would think they’re coming out on top.
Sadly this is not the case. The smaller, higher interest debt is actually the more dangerous one. Growing at a faster rate than the larger debt, the compound damage it can cause over a long period of time is far greater. In this case, you should pay off the store credit as soon as possible, while still servicing the lower interest on the credit card.
Not entirely. Once you have bought something on store credit it can be used to your advantage. Any form of debt that gets paid back in full and in a quick manner can seriously help your credit report.
If you choose to buy a TV on store credit make sure you pay the item off in full in as little time as possible. The longer the money is outstanding the more damaging those high interest rates will become.
Check out more of our personal finance articles