Considering opening a store account? Ask these 5 questions first

Considering opening a store account? Ask these 5 questions first

Published on 31st May, 2021 at 10:27 am

In December 2020, credit bureau TransUnion reported that a third of clothing account holders were three or more payments in arrears by the third quarter of that year. A key reason for the debt trap we find ourselves in is a dependence on credit for non-essential goods. To avoid the trap, ask these questions before opening a store account.

Store account questions to ask yourself

Do I really need credit?
This is perhaps the most important question, and it takes an honest conversation with yourself to know the answer. We are naturally wired to enjoy and desire instant gratification, and store accounts offer this. But we seldom need them. “We live in a world of instant gratification. If we see something we like, we want it now,” says Nicki Blignaut, senior financial planner and principal at 2one2 BlueStar, underwritten by Sanlam. Store accounts also take the work out of buying what we want because we don’t need to exercise the discipline and habit of saving and budgeting to get what we want. “People generally spend because there is a sale or they see something they really like and think if they wait until month end it may be sold out,” says Blignaut. “But if you budget or save up for sales, you can buy using cash instead of on credit.” This tool can help you save towards your financial goals.

If you are considering buying an essential item like food on credit, this is a red flag pointing to a greater budgeting problem. “If you find yourself doing this, you need to have a serious look at your budget and cut back for a few months until you get your spending under control,” says Blignaut.

If you are looking to improve your credit record, a store account can help you build one. “Where there is no credit history, a retail account used responsibly can help in building a good credit record,” says Ayanda Ndimande, strategic business development manager at Sanlam Personal Loans. Annelene Dippenaar, chief legal and compliance officer at Experian South Africa, agrees, adding, “Retail credit can be beneficial if used to buy necessary items, for example, new work clothes or school clothes. But when you start overusing retail credit, especially to buy expensive luxury items you can’t afford, it has the potential to be a disadvantage.”

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Can I afford credit?
This is largely dependent on the terms offered by the credit provider. Affordability doesn’t only mean being able to afford the minimum payments. “Ask yourself, ‘Can I pay off the full amount I am going to spend at the end of the month or at least before the interest-free period runs out?’” suggests Blignaut. This also comes down to discipline – not just to avoid spending the full credit limit you are offered, but to settle your outstanding balance every month. “It’s best to use less than 75% of your limit on this type of credit,” says Dippenaar. “Missing payments on debt is also a sure way to damage your credit report and score, as this creates adverse information on your report.”

Also consider the ‘what-ifs’ of the future and whether these will jeopardise your ability to honour your payments. If you lost your income tomorrow, would you still have enough cash to settle your outstanding balance? Dippenaar notes: “You need to be certain that you can satisfy the repayments every month for the full duration. Failure to do so will lead to defaulting.”

You can’t fool a credit bureau
Maintaining a good credit record largely depends on your consistency in payments, which translates as your trustworthiness and integrity as an account holder. “Paying a lump sum on an account and then skipping payments afterwards could be seen as negative behaviour, even though the account is technically not in arrears, as some scoring models look at monthly payment activity,” says Dippenaar. Having an unstable income could also predict your ability to honour repayments. “Late payments will negatively affect your credit score – and the later the payment, the bigger the effect,” says Kriben Reddy, vice president of TransUnion Consumer. “A 90-day late payment is more damaging than 30 days late.”

Store account questions to ask a credit provider

What are the terms of credit?
“This includes interest and other fees, and the duration of payment,” says Ndimande. It’s important to understand this and make a call as to whether it’s worth racking up interest and being bound to servicing your store account debt for the foreseeable future. “Also compare the credit offer to a cash purchase,” says Ndimande. Calculate what the total cost of credit will be at the end of the payment term and compare this to the amount you would pay if you purchased the item in cash.

What is the total cost of credit?
The total cost of credit is the original loan amount, plus any fees, interest or insurance attached to the credit agreement. “Store credit interest is usually much higher than prime ¬– up to 21% – and often the credit provider charges an initiation fee and card protection insurance, and even a monthly card fee,” shares Blignaut. She also points out that, even if you are considering opening an account just to purchase an item on sale, you may even end up paying more than the original full retail price for the item because of these add-ons.

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Is credit the only way I can purchase the goods?
Clothing and furniture retailers often incentivise purchasing goods on credit by offering cash-back vouchers, freebies or an extended repayment period for settling the account. Before taking up these enticing offerings, “consider whether you can use cash or a lay-by,” suggests Ndimande. If you haven’t got the cash on hand, ask the retailer whether a lay-by is an option. This means you don’t need to worry about the item being sold while you are saving for it, and when you make the final payment, it’s all yours and you have the peace of mind that there isn’t any money owed on it.

What happens when the account is settled?
Avoid being caught by hidden maintenance fees by asking how a settled account is treated by the credit provider. “Ask whether the account will close automatically or if it will incur fees,” suggests Ndimande. “And ask about the termination-of-account process.”

Get sale-ready

Impulse purchases can give us thrills in the moment, but paying them off can have a severe impact on your financial situation, and lead to sacrifices that may not have occurred when you first made the purchase.

“Find a good financial planner who knows what your saving goals are and can help you stick to them,” suggests Blignaut. Your savings goals can include having some cash saved up for bargains that would be a worthwhile spend for you. “If you aren’t disciplined enough to manage a savings account, chat with your financial planner about opening a unit trust,” suggests Blignaut. “I always tell clients that I am the ‘good angel’ on their shoulder: if they need to draw money from their unit trust, they need to call me and then we can decide together if it is a want or a need.”

Reddy shares a closing thought: “There are cases where you can use credit positively, but it should take place within the context of a solid budget, so that you know where your money goes every month. At the end of the day, good financial health and wellness feels better than any item of clothing.”

Book a meeting with a qualified financial planner today to gain peace of mind about your finances.

 

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