As retailers encourage us to spend, spend, spend, the steady growth in both personal debt and income stagnation appears to show little sign of abating. This increase in personal debt is a growing problem in a number of countries and research across 20 European nations suggests that consumer mortgage and non-mortgage loans totalled €9 trillion at the end of 2011, up from €8 trillion in 2007.
The reason? Most people simply cannot live without various forms of credit. And this isn’t because of profligate and irresponsible spending by much of the population. Despite this seductive illusion, the reality is quite different. Instead, what research shows is that most people are over-indebted as a result of having to cope with unexpected life events like illnesses or the need to pay for essential living costs.
Debt is big business
We also have to remember that debt has become highly profitable for banks and businesses seeking to deliver increasingly elusive profits. Debt is big business and it is common now to see the debts that people owe to store cards and credit cards sold on to financial institutions, who then profit from having a steady stream of people who pay interest on these cards but can’t actually pay them off.
In many countries we’ve seen the rise of this phenomena of voracious credit selling, with few regulatory restrictions, which leads us to the issue of store cards.
Despite there being nearly 13m of these accounts in the UK, store cards have earned a bad reputation. This is understandable. Store cards are a type of credit card that is specifically offered by shops to customers and which often come with very high interest rates. They differ from store to store, but many offer rewards when customers use their these cards to pay for goods in store. But if you fail to keep up with payments, as many do, you can quickly end up in an increasing spiral of indebtedness.
Enticing offers
A problem with store cards is that they are so easily accessible – people can often just quickly sign up at the checkout and then start spending immediately. Many stores actively encourage their customers to sign up for their cards when it comes to paying, with the offer of discounts on their purchases that day.
For those struggling to make ends meet this can be a very enticing offer, especially if they are offered 25% off what they’re buying. But with very high annual percentage rates, or APRs (sometimes around 30%), these store cards do not tend to be good value for borrowing – they get you in the long run.
And, if you think you can get away with signing up to a card for the discount at the till and then not use it later on, you may struggle to stick to this. There is research that indicates that store cards frequently come to function as a regular substitute for bankcards and indeed as a supplementary credit line. This is especially the case for those with little disposable income.
Also, although the process may look simple, getting a store card requires a credit check which, if unsuccessful, can damage your credit score, and therefore your capacity to borrow in the future.
A better way
There are many ways to obtain easy credit nowadays – from payday loans, credit cards, bank loans and store cards – but all come with their own risks. And for those who are increasingly pushed by the growing disparity between stagnating wages and rising food and living costs, credit use of some sort is inevitable.
There are ways, however, that don’t necessarily draw people into potentially damaging credit relationships. Credit unions are a safer and more responsible way of getting credit, as their interest rate ceiling, ethical collection practices and more responsible lending leads to a lower number of loans that are defaulted on. There are also many around the country.
So while the process of obtaining a store card may look incredibly simple, and their association with long-established high street shops gives them an element of credibility, there are far more effective ways for people to access credit.