Store cards to carry rate warning

Consumers who take out store cards are losing at least £55m a year thanks to uncompetitive interest rates, the competition watchdog said today.

A two-year investigation into the store card market by the Competition Commission has concluded that, although annual percentage rates (APR) on the cards have fallen in recent years, between 1999 and 2003 they were on average 10-20% higher than they needed to be.

And it ordered that card providers adopt a series of measures to make the system fairer for consumers, including the introduction of warnings when a rate is above 25%.

The Commission found that, with few exceptions, APRs on store cards were clustered around 30%, much higher than rates on many credit cards and more than they would need to be to cover providers' costs and offer a profit.

In addition, retailers were found to be selling insurance packages, which bundled together payment, price and purchase protection insurance, rather than offering consumers a choice of cover.

The Commission's deputy chairman, Christopher Clarke, who chaired the inquiry, said: "Retailers and store card credit providers are, we have found, effectively insulated from competitive pressures.

"The consequence is that store cardholders who take up credit and associated insurance pay too much."

Mr Clarke acknowledged that the market had changed over the past two years, but said measures were still needed to make it more competitive for consumers who, the Commission found, were likely to choose cards on the basis of special offers rather than the credit available to them.

And he said that even by the end of 2006 more than 90% of store card accounts would still have APRs of more than 25%.

To improve competition the Commission said card providers must include a warning on monthly statements when rates are above 25%, informing consumers that cheaper credit may be available elsewhere.

It said providers should display details about the cost of the cards more prominently, give consumers the option of paying their accounts off by direct debit and offer insurances separately.

The Competition Commission said there were 11.4m store cards in circulation at the end of 2005, down from 17.5m at the end of 2002. Some 57% of cardholders took credit on to their accounts, paying it back with high rates of interest.

The Finance & Leasing Association, which represents the major store card providers said higher APRs were "largely historic" now and that consumers were now offered a range of rates, starting from 12.9%.

The group's head of legal affairs, Ashley Holmes, said: "We are now seeing lower store card APRs, even greater choice with the move to store branded credit cards and greater consumer transparency.

"New consumer credit and insurance rules and industry initiatives all mean that consumers now have greater protection when taking out store cards."

However Mr Holmes said he was concerned that a warning on cards costing above 25% APR might act as a "back door cap" on prices and as a result might backfire.

"The remedy could harm the most vulnerable consumers, who would be rendered unprofitable to serve by store card providers and whose alternative forms of credit are at higher APRs than on store cards," he said.

However, Alena Kozakova, principal economist, for Which? said she would advise consumers to avoid store cards completely.

"In fact, it is the sales process that needs most attention so consumers know what they're getting in to," she said. "Many of the shop sales staff who sell store cards have little understanding of the financial details and yet can be incentivised for each sale. This leaves consumers in danger of being badly advised and ending up with a very expensive high interest product that they don't need.

"This report exposes the limitations of what the Competition Commission can or is prepared to do. Whilst we welcome the requirement to sell payment protection insurance separately, the bulk of the CC recommendations are unremarkable and very similar to Office of Fair Trading findings two years ago."

The Competition Commission's investigation began in March 2004 following a referral by the Office of Fair Trading. The measures it has recommended will be implemented using a statutory instrument, and are expected to come into effect by this time next year.