At Christmas, is catalogue shopping a good way to borrow money?

As Christmas approaches, it is inevitable that your spending will increase too.  Catalogues are an easy way of shopping, and let’s face it they have been around for years so they are brand names that we trust.  Freemans and Littlewoods have been around for decades and allow us the convenience of shopping at home, having the goods delivered, even on a Sunday in the run up to Christmas, and of course they offer an extensive range of payment options.  The rise of internet shopping also means that these and other catalogue-style firms have a huge online presence, selling a whole range of clothes, toys, home wares and gadgets.

Such firms inevitable offer ‘teaser’ introductory rates and special offers to tempt you into spending and opening personal accounts with them. Account holders are then offered various different payment options to help spread the costs.  In a recent survey said that the cost of catalogue credit was as ’clear as mud’, and that in some cases some catalogues were charging as much as 3times the APR of a typical credit card at 22.8% and with some of the lowest ever unsecured loan rates around, do the catalogue companies need to get smarter?

JD Williams, owners of Jacamo, Fifty Plus and Simply Be charge a typical interest rate of 58.7%; Studio charge 48.9%; Very charges a typical 39.9% interest rate and Look Again owners of Curvissa, Kaleidoscope and Witt International charges 34.9%. These are not figures that you would be used to seeing as most of the deals offered are either interest free for a set period or Buy Now Pay Later (BNPL). So if you pay the bill within the entire interest free period, usually either 3, 6 or 12 months then you pay no interest at all. So if you are able to manage this well, then it can be a good way to borrow money.  However if you fail to keep up repayments within the interest free period, it can cost you a lot. Interest is usually backdated to day one and not the date the interest free period ended.

Borrowers who pay the entire bill within the stipulated timescale, normally three, six or 12 months, pay no interest at all. Managed well, this can be a great way to borrow. But if your personal circumstances change and you run into problems, or you just miss a payment, it can cost you dearly. If you fail to pay off your borrowing in time the interest is usually backdated to day one and not the date the interest-free period ended. Much the same as payday loans, the rates are higher because there are more issues around repayments.

An example is Head teacher Jacquie Sainsbury, a Very customer who learned this the hard way, when she attempted to settle a £1621 balance. Unfortunately there was a power cut which meant her debit card payment wasn’t processed in time and she missed the deadline.  Very charge a typical APR of 39.9% and so £644 was added to her account. The matter is yet to be resolved, but she has asked Very for leniency given that she tried to make the payment. A spokesperson for Shop Direct, which owns Very, says: “Our BNPL options, at terms of six, nine or 12 months, allow customers to budget by making payments of any amount at any time to suit them, and avoid interest by paying the full cash price of the item before the end of the BNPL period. The APRs we offer are competitive, and are based on customers’ individual circumstances and their credit risk profiles.”

Very also offer monthly payment options which allow customers to take as long as they like, by paying the minimum £5 per month or 7% of the balance. But in real terms paying a debt of £500 like this would take 5 and a half years to pay back and cost £314 in interest. Whereas, paying £100 a month instead of the minimum would mean the debt would attract just £48 in interest and take just six months. Furthermore if you used a credit card at a typical 18.29% APR and repaid £100 a month, then the interest would be just £23.

Director of external affairs for the Money Advice Trust, Jane Tully, insists that the wording “take as long as you like” sends entirely the wrong message. “It could lead to customers paying a large amount of interest, even on a relatively small debt. This language should be changed as a matter of urgency.”

The Money Advice trust is one of several debt charities concerned about the high cost of catalogue debt. Indeed recent research showed that 1 in 10 callers to the National Debt line, the charity’s free advice line have major problems with catalogue debt.  It is estimated that 1.9million people used catalogue credit in 2015 to fund the cost of Christmas, and this is anticipated to rise in 2016.

Shop Direct group, the owners of Littlewoods, advertised the fact that customers can “spread the cost” with at least 20 weeks interest free credit.  After this time however, interest kicks in, but there is no indication on the Littlewoods website as to the representative APR. A spokesperson for Shop Direct told The Observer that the rates are individual to a customers’ particular circumstance and that very few customers opt to repay so that interest is applicable.  “The majority pay the full cash price before the interest opt-out period is over. The most common rate of interest for those that do pay interest on BNPL transactions is 44.9%.”

Indeed Grattan was the only company that The Observer came across that provided a full example of the cost implications of not repaying a BNPL deal within the timescale “Failure to pay a £200 debt in 12 months incurs an interest charge of £60.69, and the new balance of £260.69 then incurs interest at a typical rate of 34.9% until repaid.”

MoneyComms founder Andrew Hagger states that many people wouldn’t buy things from catalogues if they were aware of the potential cost. “Because the interest charges are applied over multiple weeks or months, the customer loses track of how much they are actually paying back,” he says. “Much like payday loans and credit builder-type credit cards, the interest rates are high because the default rates and non-payment issues are more common than with mainstream credit.”

StepChange debt charity confirms that 36% of its clients have catalogue debt, with the average amount owed standing at more than £2,000, and rising. Spokesman Edward Ware said “Catalogue credit can be an extremely expensive way to shop if people cannot afford to pay it off quickly or they miss payments. People need to think carefully about whether credit is the right option for their shopping, before searching for the best deal and deciding whether they can afford to pay off the balance before interest starts to mount up.”