Illustration: Rachel Cripps
Imagine being rewarded with free clothes, discounts, and the recurring chance to enter into prize raffles for vacations or new cars simply for being a loyal shopper? Does it sound too good to be true? Perhaps it is.
That is the pitch for a re-emerging trend called ‘Buy Now, Pay Later’ store credit cards. In particular, these cards are being offered at clothing retailers targeting younger clientele such as New Look and H&M. But don’t rush off to get your own store credit card just yet! These cards, which entice you with a bevy of ‘rewards’, bank on sky-high interest rates often DOUBLE a standard credit card’s interest rate with low minimum monthly payments. As a result, you could be swallowed up by debt on interest rates if you fail to pay.
The ‘Buy Now, Pay Later’ model is nothing new. It is a combination of layaway plans (having the user’s balance paid off gradually but purchases stay in the store until they are fully paid for/you finish paying for them) for slow payments and high-interest credit cards. If these cards have their balances paid in full every month, the marketed rewards such as raffle drawings or discounts might be worth it. However, since the card is designed to imitate a layaway program by giving shoppers the option to pay off items in slow installments over a period of time, this only creates a situation where card-holders quickly amass extra debt in the form of interest.
In fact, shopping programs such as store layaway savings programs operate differently than credit card programs, and are often more sound for larger purchases (i.e. £50 minimums). With layaways, you pay regular installments over time and although your purchase stays in store until the transaction is complete, they hold your item without charging interest.
It is this incentive to make gradual payments towards immediate large purchases, with often a standard £50 minimum, that puts customers at enormous risk due to dangerously high interest rates. The average credit card’s APR is often between 14-16 per cent, however, well-known retailers like New Look (28.9 per cent), Argos (29.9 per cent), and Amazon’s credit-building cards (29.8-39.9 per cent) offer far higher interest rates.
Part of the reasoning behind high, blanket-rate APRs is that they are aimed at a younger clientele. Many of the shoppers interested in ‘Buy Now, Pay Later’ schemes at these particular retailers may have low or non-existent credit scores (credit scores describe an individual’s ability to pay off debt). These ‘unscorable’ shoppers pose a credit risk to the company. Since no credit scores checks are needed for issuing these store credit cards, they are able to bury the incredibly high rates in the tiny fine print of store card brochures that 99 per cent of the young buyers would not even bother to read.
Another danger of the cards is that their younger clients, whom these cards are targeting, may not fully understand the risk that using these cards entails. These cards can be set up within a matter of minutes at the checkout counter if you are over 18 years old, and a debit/credit card can be used as a ‘valid form of ID’.
When it’s being marketed in the shop, naturally there will be a focus on its purpose as a reward card that earns you exclusive deals. The stores are trying to entice you into purchasing their product because the company will most likely be earning greater profits on your interest than on the occasional t-shirt that you buy. Card activation is available in-store to speed up the process as well as increase the likelihood you will get the card, as customers are less inclined to sign up online. However, the speed of obtaining and using the card is also a potential trap since if you are completing your purchase with several customers waiting behind you, you’ll not have the presence of mind to read the fine print on the contract that includes the sky-high interest rates! That is what the company is banking on.
While these ‘buy Now, pay Later’ cards have lower credit spending limits than a traditional credit card (which require credit checks), many offer up to £1,200 credit. The marketing strategy is ‘shop to win’. But with 30 per cent average interest rates (2.5 per cent monthly) and minimum monthly payments often as low as three per cent of your remaining balance, you’re only paying off the interest.
Furthermore, various stores have been introducing a similar version of the ‘buy now, pay later’ where you’ll be able to receive your item immediately. The difference is since these programs are largely backed by Klarna Bank (a Swedish bank which provides online financial services to over 70,000 stores globally), it allows them to offer slightly lower APRs (18.9 per cent) with return policies and buyer protections.
Be aware of these cards! Although stores promoting their own credit cards offer enticing deals and raffled promotions, they may cost you much more than you can afford.