You have likely seen the big TV promotions and in-store banners stating ‘48 months interest free’ and ‘buy now, pay later’ in the likes of Harvey Norman interest free promotions, Domayne, Freedom Furniture or other large retailers over your years.
Harvey Norman interest free promotions are regular on the television – categorised by their fast pace, flashing colours and repetitive messaging that you can purchase interest free.
These promotions all tie back to one thing; store credit cards. These offers are headlines to attract people into store finance via a personal store credit card. The Harvey Norman interest free promo is issued via a Harvey Norman credit card.
They allow you to make a purchase, on credit, and in turn give you access to the promotion. It might mean that you don’t get charged interest for up to five years while you take the product home that day.The deals vary, however the method of finance stays the same.
Here I want to introduce to you the complete guide to store credit cards. It will list the things you need to watch out for and how to use a store credit card to your advantage. All too often people try and use these interest free promotions to their advantage only to end up in debt and in trouble.
Here is what you must know to successfully dodge the store credit card traps and use them to your advantage (if at all).
What is a store credit card?
A store credit card is quite simply a credit card that is offered by a retailer (for instance; Harvey Norman, Domayne, Freedom Furniture, JB Hi Fi or similar) in order to promote you to make a purchase.
In the eyes of the retailer, the worst thing that can happen is; a customer comes in, looks at a product and then walks away empty handed because they can’t afford it. By offering store finance, the retailer in turn captures another portion of the market – those who don’t have the money to make a purchase and require credit.
These store credit cards are quite often uncompetitive in terms of interest rates and fees. If you compare them to a general low fee credit card, they are absolutely terrible. However, store credit cards are technically not meant to be used as just a general credit card (though some people do) – instead they are normally issued due to a special offer, such as ‘48 months interest free finance’ or ‘buy now, pay later’ style deals for when a customer wants to make a large purchase (such as TVs, washing machines, couches, etc).
You may have seen some store cards such as the Go MasterCard, Gem Visa, No Deposit Finance With HSBC and more.
Benefits of store card purchases
Please note that with every potential ‘benefit’ there is a flip side. Store credit cards are often opened with the best of intentions (usually because of one of these ‘benefits’ below) only to go sour due to mismanagement.
The three main reasons people are drawn to store credit cards and finance are:
You can take the product home that day without paying
Instant gratification. You can go home that same day with the product in hand. Sometimes people need things urgently, such as when a washing machine unexpectedly breaks down.
You can use an interest free period to save up the required money
It allows customers to purchase something they couldn’t otherwise afford in one big hit. I won’t go further on this as I have an opinion that if you can’t afford something, don’t go into debt for it.
If you have the cash already, you can keep it in your account longer by using a store card
For the more sophisticated household money manager, perhaps you have a better use for your hard earned money and wish to leverage the store finance option so as to keep the cash working hard against your other loans or savings goals.
E.g. you might be able to make more money (or save interest) by keeping your $5,000 on your home loan rather than using it to make a cash purchase for a washing machine that could otherwise be interest free for 5 years.
Negatives of using a store credit card
Vulnerable target market
Store finance cards can give people access to purchases they probably shouldn’t be making.
People often inflate their personal circumstances
When signing up for a store credit card, quite often people inflate their circumstances and perhaps exaggerate their earnings VS existing debts.
Card comes with higher rates after promotion ends
While the promotions and interest free periods can indeed be good, the rates of the card on incidental purchases ongoing or after the promotion ends tend to be quite high.
The card has fees and charges people forget about
While the store card may be interest free or similar on your big store purchases, there is still admin fees and other ancillary charges that are accruing on your credit card. You need to know what these are and check that they don’t undermine the promotion and end up costing you more money.
People have the best intentions but don’t follow through
People quite often use the benefits listed above as a way to sell themselves into getting a store credit card. However the reality is that many people lack the self discipline to truly use these cards as intended.
Store cards make people over commit
By offering store finance, people often over commit to buying things as they are not limited by their actual account balance. It’s like Monopoly money, you seem to spend just that little bit easier when it’s not yours.
They can make impulse purchase dreams a reality
The most scariest thing for me is that those wild impulse purchase ideas you might have (like buying the worlds biggest TV) can indeed become a reality for many people due to these store cards.
You need to apply common sense at all times when using such a card.
Why do stores like Domayne and Harvey Norman offer interest free specials for 48 months?
I guess this is a question you would need to ask the retailer. Though I do have a few thoughts;
On a positive note, a retailer is genuinely trying to help a consumer to make a purchase without hassle and on good terms so as to have the product today and pay later.
On a negative note, offering a store card can breed bad habits. People over buy and end up getting into debts they don’t or can’t service. Interest free periods lure people in.
These cards are also a nice gateway for people to buy big items and then continue using the card as an everyday credit card, something that is not often financially savvy.
Store credit card offers
There are three main offers for store cards that retailers tend to advertise.
Interest free periods
Where you don’t pay interest for a set period of time, can often be 6 months, 12 months, 18 months or all the way up to 60 months (5 years). This means you can make repayments on the set price (plus any fees) and not get charged for the interest.
Interest free periods often require set repayment towards the purchase on a regular basis.
Buy now, pay later deals
Where you buy the product today on finance and don’t have to make repayments for a set period of time. Depending on the deal you may or may not be charged interest. Sometimes the interest is accrued but not applied and only added onto the balance after the pay later deal ends.
No deposit finance
Buying something without a deposit. Pretty much just the same as the above offers except marketed in a different way. It’s telling the buyer that you can have the item without making a down payment.
What you need to watch out for with store credit cards
The end of your promotional period
At the end of the 6, 12, 18 or 60 months interest free period, you need to watch out for the high interest you will then be charged. The rates will likely be high and start to stack up heavily if you haven’t repaid in time.
While there is no interest often charged on these store card promotions, there is admin fees. An admin fee is a set charge each month, for instance $4.95 as charged by the Go MasterCard you get from Domayne.
These fees can add up. You need to know what the fees actually mean in terms of a percentage. That way, although the purchase is interest free – you still know technically what you interest rate is based on having the fees charged.
Use the Savings Guide percentage calculator to put your fee in and see what percentage it is of your balance.
Paper statement fee
A nominal charge each month to receive a paper statement. Many providers (event Telcos) charge a $2 paper fee when you can actually opt for email delivery for free instead. Get rid of this unnecessary fee, switch to email.
The way interest is treated
Look to understand how interest is treated after your promotion ends. Understand whether your purchase defaults to a cash advance rate (often higher) or whether or not it back dates interest (I don’t think this is allow any more?).
Often you cannot transfer these debts away
Check whether you can do a balance transfer on these debts prior to signing up. While you shouldn’t be relying on a balance transfer to repay these debts, some cards are touted as unable to accept balance transfers for repayment. Something you should look into prior to signing up for store finance.
Strategies to pay off your store credit cards
Put a note in your diary or calendar
Don’t forget the date that your promotional period ends. You may think you will remember it, though unless you mark it in calendar or diary – how will you ever remember the exact day your interest free period ends? You want to have repaid your debt in full well before this date.
Setup automatic repayments
Be sure to setup automatic direct debits onto your store card. You want to make frequent repayments to ensure you never get to the end of a promotional period and still have a sizeable debt to repay.
To do this easily, figure out how many fortnights or months between now and the end of your interest free period and use that number to divide into your debt amount.
For instance, if you owe $2,500 and have 6 months interest free – which would mean your offer ends in July of that year – divide $2,500 by 6 and make that repayment every month ($417).
Turn off paper statements
$2 per statement is a rip off. Turn this off as stated before.
Lump sum repayments each pay cheque
As well as doing automatic repayments, why not add an extra $50 or $100 here and there to your debt? Get the BPAY details for your store credit card and save them in internet banking in case you wish to make a cheeky repayment.
Avoid using for everyday purchases
Don’t use your store card to buy petrol, groceries and other everyday items. The card should only be used for big furniture/home related purchases from the original retailer as a once off.
If you start doing the shopping on your card, you are in for a mighty long repayment schedule.
Your statement shows the end of interest free periods
Remember that your statement often lists when a promotion ends. So if you forget when your interest free period will end, check your latest statement.
Destroy the card
If you don’t trust yourself to not use the card – cut it up.
My personal experience with store cards
I have had two separate experiences with store cards in my life. The first, not so good. The second actually was really smart.
Here are the details;
My first experience with Go MasterCard that went wrong
I bought a TV for $2,000 when I barely made that much money in 3 months of pay (student). I truly didn’t know any better and wanted a huge Sony Bravia TV. I bought it, took it home and marvelled at its size and awesomeness.
I didn’t make repayments, I had other debts I was already trying to service and I ended up expiring my interest free period and accruing interest at an incredible rate. I eventually paid it off after many many months of having interest charged. I probably paid an extra 25% for the purchase because I mismanaged my store credit card.
Once I paid the card off, I tried to shut it down. However I still had outstanding interest to repay as it was mid month. The amount was something like $3.98 and I was unable to repay easily as BPAY wouldn’t let me do such a small transaction and I had no other means to repay it.
I ended up having to get a bank cheque (at a cost of $10) issued to repay the $3.98. Silly me.
Years later, I used the Go MasterCard properly
Fast forward to a few months ago. I was renovating my house, had good savings and cash flow and was needing to buy a new stove and air conditioner. To help me manage my cash flow, I opted for the Go MasterCard again with 9 months interest free.
This meant I kept the money I had already saved on my mortgage, only to withdraw it when I needed to pay the builder (whose terms were 30 days). This meant I kept the thousands of dollars I would have otherwise outlaid on the stove in my home loan. I saved interest, paid the builder on time and continued to earn money for 9 months before repaying the store card in full.
I paid $44.55 in admin fees but enhanced my cash flow at a time when I needed cash for the renovations. A nice and cheap alternative to paying daily interest for not keeping that money on my home loan.
Parting word of warning about store credit cards and your credit history
Store credit cards may affect your credit rating (as do any credit cards at that). I recently signed up for Veda Score to check my credit rating and was labelled as ‘higher risk’ due to my open Go MasterCard. According to Veda (credit reporting agency) these store credit cards are often flagged as making the customer ‘higher risk’ as history has shown that these cards are often utilised by more high risk customers.
So please remember that your store credit card could indeed have an impact on your credit score for future loans. My final words are this; store cards and their interest free periods can be great things (if used wisely). They can also be deadly debt traps. It comes down to you and you alone – be smart with store credit cards.
What is your experience with store cards?
I want to hear from everyone their own experiences with store cards. Were they good, bad or indifferent? I hear so many different stories from readers, I would be keen to know your thoughts in the comments below.