Do you own one or more of these cards? Do you use them regularly?
Then you probably know what their main problem is. But for those of you who are just thinking about getting one of them, here is a warning…
And no, the high interest rate is not the main problem. Indeed, it is an issue, but not the biggest one.
The number one problem with Store and Hire Purchase Credit Cards is that you have no control how to allocate payments against each of your purchases.
How Normal Credit Cards Work
With usual Credit Cards you have certain number of days interest free. On the due date you can choose to pay the full balance owed or a minimum payment, normally at 3%.
If you pay in full, then the bank won’t charge any interest. However, if you don’t pay in full the interest kicks in from the first date you made your purchases (or from the last balance date, depending on circumstances).
That interest is applied equally to all purchases. The next time you make repayment, that amount is again applied equally across the whole balance.
So it doesn’t make any difference whether the bank applies your repayment against one purchase or another. All are treated the same.
Most Store Cards, however, work completely different.
How Store & Hire Purchase Cards Work
These types of Credit Cards don’t treat the individual purchases the same way. As you probably know, sometime the retail stores offer deals like 18 months interest free, deferred payments and so on.
Every time you make a purchase, the finance company that issued your card will keep track of each purchase separately.
Then, when you make a repayment, they divide it into smaller parts and apply them individually against each purchase.
And here it stats to be interesting…
If you read their Terms and Condition, they usually say something like this:
The repayments are applied in this order – first to the oldest debt and then to debts with highest interest rate.
Hmm, that’s sounds fair and logical, doesn’t it? Even most financially savvy people will not spot anything wrong with it. But let’s have a bit closer look.
Theoretical Scenario for 2 Hire Purchases
Let’s work with this example: Today you buy something worth $1000 on a special 18 months interest free deal. Usually you get first 3 months no payments, no interest and then further 15 months interest free.
Tomorrow you buy something else worth $1000 on normal terms. It means you again get initial 3 months no payment, no interest.
So far so good. The next 3 months you are enjoying your new purchases, pay no repayments and no interest is being charged.
Interesting things start happening after 3 months.
You will receive balance statement in your mail, saying that your minimal repayment is 3% for the first deal and 3% for the second. That makes $30 + $30 = $60.
But you are a wise person and know that by making just minimum repayments it will take too long to repay your debt. Therefore you decide to pay more than just the bare minimum. Let’s say you set your monthly repayment at $200.
What would be the best outcome for you?
Obviously, you want to allocate $170 to your second purchase because this one started accruing interest already. Your first deal will still be interest free for the next 15 months. It makes perfect sense to pay off the second deal first and then focus on the first one.
Yes, that’s right, but it’s not what your finance company will do.
Because your first purchase is “older” they apply $170 towards it and only $30 against your second one that is accruing interest. With this arrangement you are unable to put even 1 extra dollar against it!
That’s because the finance company will apply every single extra cent you pay to the “older” deal, not the one that is most costly for you. Remember, what’s most costly for you is the most profitable for them!
Feel like in a trap? Yes, you are! But it’s not just you; thousands of other people are in the same boat with you.
Honestly, how many people read all the Terms and Conditions when they apply for this kind of Hire Purchase Cards? Or how in detail are the terms explained to them by sales people in stores who usually carry the initial paperwork?
It’s safe to say that very few people are truly aware of the full extend these deals bring upon them.
So, the next time you will be swiping your existing or applying for a new Store Card, think about this! Yes, these cards are very convenient at the first sight. But if you dig a bit deeper, they can be very expensive in the long run.
What about you? Have you got own experience with Store and Hire Purchase Credit Cards? We would love to hear your thoughts, please share them in the comments below.