Question: I have a couple of credit cards from banks but now some retail chains in the UAE are also issuing credit cards. What are the advantages and disadvantages of signing up for such retail credit cards? What do I have to guard against? What about the interest rates and penalties?

Answer: Credit cards linked to retail outlets are designed to encourage customers to shop at the named store, rather than take their business elsewhere.

They are usually implemented as part of a wider business strategy aimed at promoting and rewarding customer loyalty.

These credit cards act in the same way as ordinary credit cards, with the same rules and regulations, and are usually run as a joint venture between the store and a specific bank or lender.

On the plus side, they can make everyday shopping, especially at supermarkets, simpler as they remove the need to think about cash.

Their main advantage is that they offer users on-going promotions and discounts on goods, often through the issuance of bonus points in line with the amount spent on groceries.

These bonus points can then be used to buy further items at a reduced price, or saved up to qualify for free items. In this way store credit cards can help save you money on your weekly shopping bills.

Many of these cards go further than simply offering in-store deals, often coming with extra benefits similar to those available with ordinary bank credit cards, such as interest free periods, free balance transfers, cash loans, discount on travel, free insurance and emergency road-side breakdown assistance.

They will also appeal to the growing number of consumers who are moving online to shop, with some retail outlets offering customers further discounts if they use their card to make online purchases, following in the footsteps of other industries, such as the travel sector.

Booking flights for instance is now largely done via airline websites — without a debit card or a credit card this would mean a time-consuming trip to the travel agents with a wallet full of cash.

However, where there are benefits there are also downsides. One of the main things to be aware of with store credit cards, and credit cards in general, is that the interest rates can be substantially higher than other types of debit card.

High interest rate

This means that to reap the benefits, you must be stringent about paying off the card debt each month. Because if you don't you could find yourself being charged a significant sum in interest rates and fees, as well as losing out on any sign-up promotions, including interest free periods, free balance transfers and loans.

Strict cancellation policies are also common — with some stores requiring a written retraction to end the agreement, often a month ahead of the date you wish to sever the contract.

It may look like an unassuming form you are filling in to sign up for a store credit card, but remember this is a legally binding financial agreement and you will be expected to abide by its regulations.

Whether you decide to sign up for a store credit card or not, there is clearly much more to think about than it at first appears. The underlying advice from independent financial advisors is always to be ‘finance aware'.

Make sure you know how much money you have to spend before you go out shopping, and set yourself a realistic monthly budget, which you can pay off in full, and on time.

 

The writer is Chartered Insurance Broker, Sales Training Manager, Nexus Insurance Brokers LLC. Views expressed here are the writer's and do not necessarily reflect that of Gulf News. If you have any questions, please e-mail it to advice@gulfnews.com