The Danger Of Store Credit For Your Wallet
As of 2021, store accounts are the top source of credit purchasing in South Africa. Many retailers in South Africa, from clothing to building material shops, offer store credit cards. These accounts allow customers to purchase goods from a specific retailer on credit, and come with incentives and discounts. If you shop at a place often, getting store credit may seem like a good way to save money, or stretch your budget further. And while store credit can help you afford more than you could buy otherwise, these cards are not always the easy ‘buy now, pay later’ option they seem. Here are four reasons to be careful before signing up:
You May Spend More Than You Can Actually Afford
Store cards are very easy to apply for (all you need is a small income and an ID card). They also make it very easy to spend money. While your store account may have a credit limit, inexperienced credit holders especially are at risk of underestimating how much they can afford to repay. The illusion of being offered a ‘good deal’ when using your store card may also tempt you to spend more than you initially planned.
Many store cards also have lower credit limits, which means the store allows you a fairly low amount of money on credit. While this initially sounds like a good thing, it may actually tempt you to use credit more often than you realise. For example, if your limit is R200, you can spend this and pay it back fairly easily. Now you have another R200 available, spend it, rinse and repeat. Unless you keep good records about how much credit you’ve used, you can easily lose track of how much you’ve spent.
Hidden fees
Store cards often carry hidden fees that are not mentioned in the advertisements. For example:
- Initiation fee
- Membership fee to access promotions
- Monthly service fee
- Extra interest on overdue amounts
The store is legally obligated to disclose all fees to you before you sign an agreement, so pay attention to this. Make sure you know when you will be charged interest, what penalties you will be charged for late payments, and what you can do if you can’t afford to repay.
Higher Interest Rates Than Traditional Credit Cards
While a credit card often comes with a personalised interest rate, interest rates for store card are fixed, and usually higher than a credit card. If you do need to use credit, it could be cheaper to use a credit card from the bank rather than a store card.
Store Cards Will Affect Your Credit Score (In Two Ways)
Store credit is still credit, and just like a late repayment for a loan, late payments to a store account will be reported to the financial bureaus. If you manage your account well, store cards can be an accessible way of building up your credit score. But if you accidentally spent more than you can afford to repay on store credit, this could decrease your credit score, making it more expensive for you to access other types of loans in the future.
Regularly maxing out the credit limit on your store card could also affect your credit score. Credit bureaus analyse your credit utilisation ratio when calculating your credit score, and your store credit counts. The low credit limit on your store card makes it easy to spend all of it without noticing, and if you do this too often, you will be marked with a high utilisation ratio. This lowers your credit score.
The Take-Away
In conclusion, while store credit cards may offer tempting incentives and discounts, they should be approached with caution. Before signing up for store credit, it’s essential to weigh up the benefits and costs to use and make an informed decision. Be sure to also explore alternative finance options that may suit your budget and long-term goals better.