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Why do store card rates continue to rise?

Despite the fact that UK base rates are still at 0.5%, since 2007 we have seen the rates charged on standard store cards remain fairly steady and actually start to trend upwards over the last 18 months. The average store card interest rate is now just over 25% which suggests a gross margin of 24.5%, although in reality the cost of finance for store card operators is significantly higher than 0.5%.

However, it is still difficult to justify a gross profit margin of 20% on funds forwarded to customers especially in these tough times. When you also consider the fact that the money being borrowed is being used to acquire goods within the store, this is most definitely a win-win situation for the UK retail sector. But is it actually that simple?

As with traditional credit cards, we have seen default rates increase substantially on store cards as more and more people suffer financial distress and are struggling to meet their obligations. However, is it really a sensible strategy to maintain relatively high profit margins, in order to protect current profitability, while increasing the cost of borrowing for all customers across the board?

Store cards have for some time been among the most expensive financial instruments available in the UK and despite attempts by the authorities to control this particular sector, profit margins, in theory anyway, remain higher than ever before.

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