Credit Card APRs Under Scrutiny

The Office of Fair Trading (OFT) is to launch an inquiry into credit card interest charges and how they are calculated after a 'supercomplaint' made by a UK consumer watchdog.

The complaint was made by Which? and relates to how credit card companies calculate interest and questions the reliability of these calculations.

According to Which?, the UK's top 20 credit cards now charge customers interest and fees in 12 various ways, resulting in card holders being charged interest at a higher rate despite opting for a lower APR. The watchdog estimates that if all UK credit card holders had the most favourable formula applied to their credit card debt they would collectively save around £400m per annum in interest payments.

Which? are demanding the OFT standardise the system used for applying APR's in order for consumers to make more accurate comparisons between credit card rates.

Which? invoked a little known government granted power in order to make their 'special complaint'. The legislation allows consumer bodies to force regulators to examine any complaints they make.

Around half of UK consumers believe that by comparing APR's will allow them to select the cheapest credit cards.

However, principal economist at Which?, Alena Kozakova, warned: "Our research shows that APR cannot be relied upon for true credit card comparisons.

"Two people who have different credit cards with he same APR, and who use their credit card the the same way, could be paying very different levels of interest. Consumers have to be able to make meaningful comparisons on the basis of APR. We are calling on the OFT to standardise interest calculation methods so that consumers can compare like for like."

However, the British Bankers Association stated that there were "a lot of [different issues] for banks to absorb, and it's not easy to do so when they are coming at you from left, right and centre."

Alisdair Milton
11th April 2007

More Information:

• Making Credit Card Fees Easier To Understand
  On average, UK credit card issuers make somewhere between £300 and £400 million a year in fees charged off of UK credit card users who have not fully understood how the credit card issuer has arranged the charging of their fees and who do not complain directly to the card issuer for any excessive or incorrect fee charges. In anyone’s language, this is a staggering amount of money!
• Credit Card Charges
  Credit cards appear to have only one cost to a user – the interest charged on purchases, but there are a whole raft of hidden charges just lurking below the surface. So, some cards offer an annual payment option in return for certain benefits. What is the best option, and in what circumstance
• How To Avoid Paying Those Pesky Credit And Debit Card Fees
  It seems that UK credit and debit card providers would like to charge us each and every time we use our plastic cards these days. While the charge for each separate individual transaction may not seem like much, add them up over a month or two and suddenly the amount has some value. So, how do we avoid having to pay pesky fees to UK credit and debit card providers?

External links:

• Office of Fair Trading (OFT)
• Bank of England