Remortgage to Clear Store Cards

Why Store Card Debt Is So Expensive

Store cards have long been criticised by consumer groups and financial commentators for their exceptionally high interest rates. Understanding just how costly they are can help put the potential benefits of consolidation into perspective.

Interest rates well above average

While the average credit card APR in the UK sits at around 22-25%, store card interest rates frequently exceed 30% and can reach as high as 40% APR. These rates are among the highest of any mainstream financial product. A purchase of 500 pounds on a store card at 35% APR, with only minimum payments being made, could take over a decade to clear and cost more than the original purchase price in interest alone.

The lure of sign-up discounts

Store cards are typically offered at the point of sale with an attractive initial discount, often 10-20% off your first purchase. This can seem like a good deal at the time, but the saving is quickly wiped out if you do not pay the balance in full the following month. The initial discount is a marketing tool designed to encourage you to open an account, after which the ongoing interest charges far exceed any saving you made.

Limited usefulness

Unlike a standard credit card that can be used anywhere, store cards are usually limited to a single retailer or group of retailers. This means you gain none of the flexibility of a regular credit card while paying significantly more in interest. Some store cards have evolved to include a Visa or Mastercard function, but the interest rates remain at the higher store card level.

Minimum payment structure

Like credit cards, store cards have minimum payment requirements that are typically set at a low level, often just 2-3% of the balance or a minimum fixed amount. Paying only the minimum means the vast majority of your payment goes towards interest rather than reducing the balance. This can create a cycle where the debt seems almost impossible to shift.

Psychological spending triggers

Store cards encourage loyalty to a particular retailer and can trigger additional spending through exclusive offers, early access to sales, and reward points. While these perks may seem attractive, they can lead to purchasing items you might not otherwise buy, adding to your balance and the overall cost of the debt.

When you consider that a mortgage rate might be around 4-6%, compared with a store card rate of 30-40%, the potential for savings through consolidation becomes very clear. The challenge is ensuring that the long-term implications of adding this debt to your mortgage are fully understood and planned for.

How to Remortgage to Pay Off Store Cards

The process of remortgaging to clear store card debt follows the same general approach as any debt consolidation remortgage. Here is how it works step by step.

Calculate your total store card debt

Start by listing every store card you hold, along with the current balance, interest rate, and monthly payment on each. Contact each store card provider if necessary to confirm the exact outstanding balance, as this may differ from the figure shown on your latest statement due to interest accrual.

Assess whether you have other debts to include

If you also have credit card balances, personal loans, or other unsecured debts, it may make sense to consolidate everything at once rather than just the store cards. This approach can maximise your monthly savings and simplify your finances more effectively.

Determine your equity and LTV

Your property equity is the difference between its current market value and the amount outstanding on your mortgage. To consolidate store card debt, you need enough equity to cover the additional borrowing while keeping your total mortgage within the lender's maximum LTV threshold, typically 85-90% for consolidation purposes.

Engage a mortgage adviser

A whole-of-market mortgage adviser will assess your complete financial picture and search for the most suitable remortgage deal. They will consider your income, credit history, equity position, and the total debts you wish to consolidate. Their recommendation should include a comparison of your current costs versus the proposed consolidated arrangement.

Submit your application

Your adviser will handle the application process, submitting your details and supporting documentation to the chosen lender. The lender will carry out affordability assessments, credit checks, and a property valuation. If satisfied, they will issue a formal mortgage offer.

Complete and settle

On completion of the remortgage, the additional funds raised are used to pay off your store card balances. Many lenders will pay the store card providers directly to ensure the money is used for its intended purpose. Once settled, you will have a single monthly mortgage payment in place of your previous mortgage payment plus multiple store card payments.

It is advisable to close your store card accounts once they are paid off, or at the very least reduce the credit limits to a minimal amount. This removes the temptation to rebuild the balances and ensures you get the full benefit of the consolidation.

Is It Worth Remortgaging to Clear Store Cards?

The question of whether remortgaging to clear store cards is worthwhile depends on your individual circumstances. Let us examine the key factors to help you assess whether it is the right choice for you.

The monthly payment comparison

Consider a homeowner with 8,000 pounds of store card debt spread across three cards at an average APR of 34%. The combined minimum payments might total around 240 pounds per month, with a large proportion going towards interest. Adding that 8,000 pounds to a mortgage at 5% over 20 years would cost approximately 53 pounds per month in additional mortgage payments. The monthly saving of 187 pounds is significant and immediately improves your cash flow.

The total cost comparison

While the monthly savings are impressive, the total cost tells a different story. If you continued paying 240 pounds per month towards the store cards (above the minimum), you might clear them in around four years, paying approximately 3,500 pounds in interest. Adding the same 8,000 pounds to a 20-year mortgage at 5% would cost approximately 4,640 pounds in interest. Over a 25-year term, the interest cost rises further.

The interest rate differential

The gap between store card rates and mortgage rates is among the widest of any debt consolidation scenario. At 30-40% APR versus 4-6%, the rate difference is enormous. This means that even accounting for the extended repayment period, the monthly savings are very substantial. If you commit to making overpayments on the additional mortgage borrowing, you can significantly reduce the total interest cost while still benefiting from lower monthly payments.

Your spending habits

Perhaps the most important factor is whether you will change your spending behaviour after consolidation. If you clear your store cards and then start using them again, you could end up in a worse position than before. Be honest with yourself about whether you are likely to rebuild the balances. If you think you might, consider closing the accounts entirely and cutting up the cards.

Your overall financial health

If store card debt is just one part of a broader pattern of financial difficulty, consolidation alone may not solve the underlying problem. In this case, seeking free debt advice from organisations like StepChange or Citizens Advice could help you develop a comprehensive plan for managing your finances sustainably.

For most homeowners with significant store card debt and sufficient equity, consolidation through remortgaging can be a sensible strategy, particularly when combined with a commitment to close the accounts and avoid rebuilding the debt. A qualified adviser can help you run the numbers for your specific situation.

Eligibility and What Lenders Look For

Lenders assess applications for store card consolidation remortgages using similar criteria to any other remortgage application, though the presence of high-cost debt does add some nuance to the assessment.

Equity in your property

Sufficient equity is essential. The lender needs to ensure that the property's value comfortably supports the total borrowing after consolidation. Most mainstream lenders require the post-consolidation LTV to be no higher than 85%, while some specialist lenders may accept up to 90% or 95% at higher interest rates.

Affordability under FCA rules

All UK mortgage lenders are required by the Financial Conduct Authority to carry out robust affordability assessments. They will examine your income, regular expenditure, and existing financial commitments to ensure you can sustain the new mortgage payment. The positive aspect of consolidation is that your overall monthly outgoings will typically reduce, which can actually improve your affordability position.

Credit file and payment history

Having store card debt does not automatically count against you, but lenders will look at how you have managed it. Making regular payments on time demonstrates responsibility, even if the balances are high. Missed payments, maxed-out limits, or defaults will make the application more challenging, though specialist lenders may still consider you.

Number and type of credit commitments

Lenders will review the number of active credit accounts you have. Multiple store cards and other credit commitments can suggest a pattern of relying on credit, which some lenders may view cautiously. However, the fact that you are actively seeking to consolidate and simplify your debts is generally viewed as a positive step.

Reason for the debt

Some lenders may ask about the circumstances that led to the store card debt accumulating. Being transparent about the reasons, whether it was a period of overspending, unexpected expenses, or a temporary drop in income, and demonstrating that you have a plan to manage your finances going forward can help your application.

Strengthening your application

• Make at least the minimum payments on all store cards and other debts in the months leading up to your application.
• Avoid opening any new credit accounts before applying.
• Check your credit report for errors and have them corrected.
• Ensure you are on the electoral roll at your current address.
• Have all necessary documentation ready, including payslips, bank statements, and store card statements.
• Work with a specialist mortgage broker who has experience with debt consolidation cases.

A skilled broker can present your application in the best possible light and match you with lenders whose criteria align with your circumstances. This can make the difference between approval and rejection.

Alternatives to Remortgaging for Store Card Debt

Remortgaging is not the only option for dealing with store card debt. Depending on the amount you owe and your financial situation, one of the following alternatives might be more appropriate.

Balance transfer to a 0% credit card

If you have a reasonable credit score, you may be able to transfer your store card balances to a credit card offering 0% interest on balance transfers for a promotional period, typically 12 to 24 months. This allows you to pay off the debt without any interest charges during the promotional period. You will need to pay a transfer fee, usually 1-3% of the balance, and must be disciplined about clearing the debt before the promotional rate ends.

Personal loan

An unsecured personal loan at a rate of perhaps 6-10% is far cheaper than store card interest of 30%+ and allows you to clear the debt over a fixed period of three to five years. Because it is unsecured, your home is not at risk. This can be a good middle ground between the high cost of store cards and the long-term commitment of adding debt to your mortgage.

Debt management plan

If you are struggling to make even the minimum payments on your store cards, a debt management plan (DMP) arranged through a regulated debt advice provider could help. A DMP involves negotiating reduced payments with your creditors based on what you can afford. Several organisations offer this service for free, including StepChange Debt Charity and PayPlan.

Snowball or avalanche repayment method

If you can manage your current payments but want to clear the debt faster, consider either the snowball method (paying off the smallest balance first for psychological motivation) or the avalanche method (paying off the highest interest rate first for maximum savings). Both approaches involve making minimum payments on all cards while directing any extra money to one specific balance.

Negotiating with store card providers

It is sometimes possible to negotiate a reduced settlement figure or a lower interest rate directly with your store card provider, particularly if you are experiencing financial hardship. Contact the provider, explain your situation, and ask what they can offer. Under FCA rules, they are required to treat customers in financial difficulty fairly.

Individual voluntary arrangement (IVA)

For more serious debt situations, an IVA is a formal agreement with creditors to repay a proportion of your debts over a set period, usually five or six years, after which the remaining debt is written off. This has significant implications for your credit rating and should only be considered with professional debt advice.

Each alternative has its own set of advantages and consequences. If you are unsure which approach is right for you, seeking advice from both a mortgage adviser and a free debt advice service can help you see the full picture and make an informed decision.

Making the Most of Your Fresh Start After Clearing Store Cards

If you decide to remortgage to clear your store card debt, treating this as a genuine fresh start for your finances will help ensure you do not find yourself back in the same position. Here are practical steps to make the most of the opportunity.

Close your store card accounts

The most effective way to prevent rebuilding store card debt is to close the accounts entirely. Contact each store card provider and request that the account be closed. Ask for written confirmation that the account has been settled and closed. If you feel you need to keep one card for a genuine reason, reduce the credit limit to a minimal amount and store it securely at home rather than carrying it in your purse or wallet.

Review your spending habits

Take an honest look at the spending patterns that led to the store card debt. Were you using them for everyday purchases, splurging during sales, or covering expenses during a difficult period? Understanding the triggers can help you develop strategies to avoid them in the future.

Create a monthly budget

Use the money you are saving each month to build a more resilient financial foundation. Create a realistic budget that covers your essential expenses, mortgage payment, and leaves room for some discretionary spending. Numerous free budgeting tools and apps are available to help you track your spending.

Build an emergency fund

One of the main reasons people turn to store cards is unexpected expenses. Building an emergency fund of three to six months of essential expenses provides a buffer that means you will not need to rely on expensive credit when the unexpected happens. Start small if necessary, even setting aside 50 to 100 pounds per month will build up over time.

Consider overpaying your mortgage

If your mortgage deal allows overpayments, typically up to 10% of the balance per year without penalty, using some of your monthly savings to overpay can significantly reduce the total interest cost of the consolidation. For example, overpaying by just 50 pounds per month on the additional 8,000 pounds of borrowing could save you thousands in interest and clear the additional debt years earlier.

Resist pressure to open new store cards

Retailers will continue to offer store card discounts at the checkout. Politely decline and remind yourself of the true cost of store card borrowing. If you want the benefits of a loyalty programme without the risk of expensive credit, look for alternatives like free loyalty cards or apps that offer rewards without the associated borrowing.

Monitor your credit report regularly

Check your credit report regularly to ensure your cleared store card accounts are being reported correctly and that your overall credit profile is improving. Free credit monitoring services are available through several providers in the UK. Watching your credit score improve over time can be a powerful motivator to maintain good financial habits.

By taking these steps, you can ensure that remortgaging to clear your store cards represents a lasting improvement in your financial health rather than a temporary fix. The key is combining the financial benefit of lower payments with meaningful changes to the habits that led to the debt in the first place.