Is interest free really interest free? Avoid the pitfalls of credit card debt
What to be aware of with store cards
Many retail merchants across New Zealand and Australia offer store cards, essentially credit cards that are limited to use in one shop, company or chain of stores.
While these cards can carry benefits, such as reduced prices or member perks, it's important to take a look at exactly what you're signing up for.
The difference between store cards and credit cards
The biggest difference between the two payment options is the limited locations you can use store cards. While they're limited to one company, credit cards can be used in most shops today.
The benefit of store cards is the rewards they offer, such as cash back, vouchers or discounts or an interest free period (IFP). Again, these are generally limited to the individual brand so consider if it's somewhere you shop regularly and if the benefit will pay off.
The catch with interest free periods
One of the biggest lures that store cards offer is a certain period when your payments are interest free. This is often six or twelve months, but varies from store to store.
While this interest free period is certainly a great help for your bank balance, it often comes with a catch so be sure to read the fine print.
The payment frequency and amount you make on a purchase is often recommended by the store, however you can usually change this. By default, payments are often set to the lowest possible amount during your IFP. What this means is that when your interest free period finishes you can still be left with a large chunk to pay – an amount that gets even bigger when an interest rate is applied, often at a higher rate than other forms of credit.
How to avoid the pitfalls of paying back your debt
If you're looking at a store card that has a payment plan in place, the best option is to make extra payments during your IFP. By doing this you can completely pay off, or make a big dent in the total before rolling over to the non interest free period.
For cases when that's not possible, put the extra payment amount aside in a savings account so you can make an immediate lump sum payment when your interest free period ends. There's also the added perk of your savings earning interest during this time too, so you could end up with a little extra in your back pocket. Alternatively, have a look around as you may find that standard credit cards or other finance options give you a better deal.
Being money wise
Whenever you sign a contract for any financial service it pays to read exactly what you're signing up for. Rather than simply looking at the perks of a store or credit card, it's important to know what you get when you go beyond the interest free period and what rates, fees and interest payments you'll have to make.