The Pitfalls And Budgeting Opportunities Of Retail Payment Programs

2014-12-22   minute read

Zaki Alam

People with poor or bad credit can have a hard time obtaining credit at a competitive or low rate. Lenders do not want to take the risk of offering loans they might not get paid for. The lower your credit score, the harder it will be to get approved, but it's not completely hopeless.

Person on a tablet holding a credit card

Retail payment programs can help in some circumstances:

  1. Store Credit Cards – The most common retail payment offering are store credit cards. Retail stores have a reputation for approving applicants who have low credit ratings. They will try and tie you to their business through easy-to-obtain store credit cards and offers of discounts, deals and reward points. Some are limited purpose credit cards that can only be used at their store. However, more stores are now getting their card backed by Visa or MasterCard, which opens up the opportunity to shop elsewhere while using their card. Retail store credit cards generally come with low credit limits and high interest rates, as much as 29.9% or more. The best way to manage a card like this is to only charge a small amount and to pay your balance in full each month.
  2. Buy Now, Pay Later – With this payment option, you can have the item now and pay at a later date. That date depends on the retail company and their associated finance provider. Many stores offer buy now, pay later as a ‘special’ offer, with a lot of them advertising a one year or more interest-free period, after which you pay for the item in full. However, it’s worth checking the small print, as quite often you will incur administrative charges and other fees.
    There will be no interest charged if you pay for the item within the contract period. However, even if you pay just one day later than the conclusion of your contract, a high interest rate on the whole balance will be backdated to the date of purchase or the date of delivery. Consider setting aside a certain amount in your budget each month so that when the ‘pay in full’ due date arrives, you will have saved the required amount. Other buy now, pay later promotions offer monthly payment plans, where they split the transaction into 12 or more monthly payments, with a final month added on as interest.
  3. Rent / Lease to Own - Consumers choose rent-to-own transactions for a variety of reasons, especially for those with very poor credit as there are usually no or minimal credit checks on the individual and the transaction is convenient and flexible. The consumer has the ability to obtain merchandise they otherwise could not get. The most common pitfalls are high prices, hidden or added costs, late rental payments issues and penalties, and problems with repair services.
  4. Home Shopping Catalogues – Although less common than a couple of decades ago, these catalogues are still around. They offer the opportunity to purchase items now with the chance to pay on flexible repayment schedules with minimal interest through weekly and monthly payment plans. They target people with poor credit ratings, boasting easier approval and interest-free payment periods. However, they also provide an easy opportunity to rebuild your credit score by having you manage the payments effectively. By paying monthly, you are demonstrating to larger lenders that you can manage your money in a sustainable and timely manner.
  5. Layaway – This is an agreement in which the retailer will hold an item for a customer until the customer has completely paid for that item. Rather than taking the item home and then repaying the debt on a regular schedule, the layaway customer does not receive the item until it is completely paid for within an agreed period of time. This is not credit and will not help rebuild your credit rating.

Credit for those with bad credit history will not have the most attractive financial terms. Annual fees, high interest rates, low credit limits and sometimes poor customer service are among the issues people have to deal with. Always use credit cards wisely. They should not be used for purchases you know you cannot afford. Any default on payments will impact your credit score and seriously hamper your ability to purchase large assets, such as a house, later on.

If you are going to access any of the retailer payment programs outlined above, the goal should be to pay your bill on time and improve your credit. Another option is a secured credit card (where you make a deposit against the card’s credit limit) to build up history with credit agencies such as TransUnion and Equifax. That way you can qualify for better credit ratings and lower interest rates, which can be done in about 12 to 24 months if you're responsible with your credit.

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