Major high-street retailers are targeting poor families with bad credit records to prop up their Christmas sales during the credit crisis.
Dozens of high street stores are taking part in a doorstep lending scheme which charges poor families extreme rates of interest. Woolworths, Comet, B&Q and Mothercare and 92 other retailers have been accepting vouchers that are repaid by borrowers at an annual percentage rate of 222 per cent – more than 10 times the rate of a credit card.
Faced with anger from politicians and consumer groups last night, the Arcadia group, owner of Topshop and Burton, pulled out of the scheme.
Debt groups said the pre-pay card and voucher schemes risk pushing poor families further into the red at a time of economic instability and would further promote a two-tier society.
The catalogue retailer Argos goes further by running a storecard scheme in conjunction with Provident Personal Credit, based in Bradford, West Yorkshire, which specialises in small-value cash loans that are paid off over a short period. The "Easy Shop Card" is only redeemable at Argos. Provident buys vouchers from Argos in bulk and then sells them on to mainly low-income families who have difficulty accessing mainstream credit. Customers are able to borrow from £100 to £500 to spend in any Argos store and then pay back the money to agents who come to their homes and collect the payments on a weekly basis.
But consumer groups have warned that the repayment rates are much more expensive than the high street banks which have been increasingly unwilling to lend to high-risk families.
A customer who borrows £100 on an Easy Shop Card and repays it over 27 weeks at £5 a week would pay a total of £135, which equates to an APR of 222 per cent. The same amount paid back over a year at £3 a week would carry a 143 per cent APR. In comparison, high-street credit cards on average charge 17.5 per cent APR.
The Liberal Democrat Treasury spokesman, Vince Cable, said promotion of the card in the run-up to Christmas was "wicked". He added: "There is a real risk of a very large number of people being exploited. It is wicked to be promoting such high-interest cards and loans at Christmas, when people feel under pressure."
Mick McAteer, director of the Financial Inclusion Centre, said: "What we are lurching towards is a two-tier society where mainstream lenders will only loan money to middle-income and low-risk borrowers while low-income families will be forced to pay very high rates."
Argos tried to distance itself from the row, saying marketing of the cards and credit vetting was carried out by Provident only. A spokesman said: "We are not involved in offering the credit facilities, determining credit worthiness or setting interest rates for the card. Nor do we manage any marketing or promotion of the card. The Easy Shop card is not promoted on the Argos website or in any other Argos marketing materials as it is a Provident product."
Provident said their loans looked dearer than they were as the comparison was being made using an annual percentage rate (APR) for interest. David Stevenson, a spokesman, said the £35 for borrowing £100 was a charge rather than an interest payment, adding that – unlike bank loans – people would not face additional penalties or interest if they fell behind. "When you take out a loan with us it never rises, even if you default," he said. "These are not credit cards. They are pre-pay cards and high-street vouchers, and everybody knows that APR is not useful for comparing small loans that are repayable over a short term."
£299.99 cash price for Playstation 3
£319 Barclaycard Simplicity, paid for over a year at 6.6% APR
£351 Egg card, `paid for over a year at 16.9% APR
£450 Provident personal credit, paid over 50 weeks at 143.1% APR
Prices are approximate comparisons