The Times has reported that some of Britain’s largest retail stores are plunging shoppers into record levels of debt. The paper accuses the stores of allowing many shoppers easy access to credit facilities which charge up to 30% of interest on outstanding balances.

Stores including Argos, Marks & Spencer and Next have apparently formed alliances with credit providers offering shoppers quick and easy access to credit. However, the Financial Conduct Authority has stated that as many as 30% of customers fail to repay their loans on time. This means that there will then be a liability to pay fees and penalty charges to the lenders. And with consumer debt levels, according the Bank of England, reaching a staggering £225 billion it’s no wonder that there is concern.

Why the retailers are so keen to offer credit in this form?

Well, the first obvious answer is that sales will improve if instant credit is available. But the second reason, which is a little more opaque, is that the retailers do make money out of the interest which they charge on the loans. For example, Next is reported to have earned as much as £250 million form interest on its finance deals. Apparently one third of Argos’ pre-tax profits in the first half of the year were derived from interest payments.

Is there an alternative?

Swedish start-up bank Klarna may well have a solution. This innovative bank offers the option to spread repayments of up to £5,000 over a period ranging from one month to 36 months. No interest will be payable as long as payments are kept up-to-date.

So how do they do it?

Simple really – they charge the retailer 4.9% of the value of a customer’s order. Apparently Marks & Spencer will be offering a similar facility from a rival bank, Clearpay, for purchases of between £30 and £800.

However, this all comes with a caveat. Even the palatable alternatives such as Klarna and Clearpay can have issues. This is because if there is a payments default, a debt will still be due and interest and charges could be charged at this point. Also, as the debt charity “StepChange” points out, a significant number of borrowers really should not be granted the credit facility at all.

However, both banks say that they are providing the credit responsibly, with customers’ ability to repay the debt being assessed and credit limits unable to be extended. This, they say, ensures that customers will be able to have access to the credit thus offering sensible flexible credit within sensible limits.