Store cards that charge interest at 25% or more a year will have to warn customers on their statements that they can get cheaper credit elsewhere.
There are about 11 million store card accounts in the UK
The measure is being imposed by the Competition Commission to help prevent store card holders being overcharged.
The commission found that the annual percentage rates (APRs) on store cards were too high.
As a result it calculated that store card users have been overcharged by at least £55m a year.
"Retailers and store card credit providers are, we have found, effectively insulated from competitive pressures," said commission deputy chairman Christopher Clarke.
"The consequence is that store cardholders who take up credit and associated insurance pay too much."
The watchdog's investigation into store cards was launched in March 2004 at the request of the Office of Fair Trading.
Last September, the commission, in a preliminary report, said consumers were being overcharged due to inflated interest rates.
It found a lack of competitive pressure on either the annual percentage rates (APRs) charged or the cost of associated insurance.
The commission now says store card credit providers must:
- where APRs are 25% or above, warn cardholders on monthly statements that cheaper credit may be available elsewhere.
- give more and better information on all monthly statements.
- offer the option to pay by direct debit.
- offer payment protection insurance separately from other elements of store card insurance.
The credit card industry, following a parliamentary Treasury Select Committee enquiry into UK debt, agreed to introduce similar warnings on statements in 2004.
The Finance & Leasing Association (FLA), the trade body for the card companies, welcomed most of the commission's proposals.
But it said it was worried about highlighting charges in excess of 25% a year:
"At first sight, the APR warning notice appears to be an attractive, simple transparency measure. But we are concerned that it may really be a back door cap, harming vulnerable consumers.
"The remedy could harm the most vulnerable consumers, who would be rendered unprofitable to serve by store card providers and whose alternative forms of credit are at higher APRs than on store cards" said the FLA.
Card users overcharged
Although the average APR being charged by store cards has come down slightly in the last year or two, the commission found that the card companies are charging interest at 10-20% above a level that would reflect the costs of providing the cards and generating a reasonable level of profit.
The result is that the average store card APR has been 26.5%.
The Commission estimates that by the end of 2006, 90% of store card accounts will still be charging interest of at least 25% a year.
It also discovered that the APRs charged on many store cards cluster around the 30% level.
By comparison nearly all credit cards - 95% of them - are cheaper, charging interest of 26% or less each year.
This has led to store card users being overcharged by at least £55m a year and "possibly significantly more", the commission said.
Which? formerly known as the Consumers Association, said people should avoid store cards at all costs and choose a cheap-rate credit card instead:
"Given that the average credit card APR is 15 per cent, all those people with APRs between 15 per cent and 25 per cent are already borrowing at a very expensive rate and will have no warning that they could be borrowing more cheaply" said Which?
The number of store card accounts in use has been declining and had dropped to 11.4 million by the end of 2005.
But with 70 different retailers offering them they are still an important source of credit for shoppers.
The commission does not accuse retailers of conspiring to cheat their customers.
Instead it points the finger at the way the whole market operates.
Among the features it highlights are that:
The commission believes that greater transparency would bring more competitive pressures into the supply of store cards, thus bringing charges down.
- store cards are often sold as a way of getting cheap offers on goods rather than on the basis of their APRs.
- customers are not sensitive to the APRs or late payment charges on store cards.
- customers do not understand the cost of buying insurance policies such as payment protection insurance which is often bundled into the cost of the card.
- card statements do not provide enough information about the charges being levied.