Personal Finance

Apart from the use of general credit cards such as Access or Barclaycard there are three other main ways of obtaining instalment credit for the purchase of merchandise. It is important to distinguish between the different methods for not only may the respective costs be different in each case, but the legal position of the customer vis-a-vis the seller may be different.

By an order made under the Consumer Credit Act 1974 it has been illegal since October 2012 for anybody offering consumer credit not to provide certain minimum information to the customer. In particular the offerer of credit must quote the true annual interest rate and the total cost of the credit including any charges, and the amount of each instalment and the number and frequency of the instalments. In this way every offer of credit can be compared as to its costs with any other form of credit.

Using a consumer credit card such as Access or Barclaycard is very similar in its consequences to buying on simple credit. With a credit card you purchase the article at the marked retail price, but instead of paying for it there and then you present your card and sign a special sales voucher. All your purchases during a month are billed to you by the credit card company the following month. If you pay within 25 days of the date of the statement you are, in effect, getting free credit for a short period. If you prefer to take extended credit you can pay off the amount in monthly instalments of not less than 5% of the outstanding balance. But in that case you pay interest. In 2012 the interest rate was 2.25% per month on the outstanding balance. This works out at a true interest rate of up to 30.6% per annum.

You pay nothing for the use of Access or Barclaycard. And if you don't take extended credit you can take up to around a month's credit without any charge at all. So who is paying the cost of all this? The answer is the retailer. He receives payment for his sales from the credit card company; however, he doesn't get the full retail price of the goods that you are having to pay, but an amount lower than the retail price by a percentage agreed by the retailer and the credit card company. In effect, therefore, the retailer is giving discount not to you, the purchaser, but to the credit card company. This discount provides the credit card company with funds with which to meet the costs of its operations.

It follows from this that any shop offering to accept a credit card ought also to offer, as an alternative, a discount for immediate cash payment. But not many shops do this


Interest-free Credit

Although buying food on a credit account has practically disappeared, buying household goods like clothing or consumer durables on credit has increased very considerably. The simplest credit purchase is one where the seller sets a retail price for an article and offers to accept, say, a 20% deposit and the balance in equal monthly instalments - often nine instalments - no interest or other charge being made. If the retail price were £100 the deposit would be £20 followed by nine payments each of £8.89.

As with the old-fashioned family grocer giving interest-free credit, a shopkeeper offering... see: Interest-free Credit


Personal And Business Finance 2017

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