Watchdogs aim to end credit card confusion

Your money: Action looms to help customers negotiate continuing muddle over cost of plastic in growth market


Treasury watchdogs are stepping up their inquiry into abuses by credit card companies, amid growing concerns that many customers are bewildered into taking on credit they cannot afford.

Banks are to be called to account in a public hearing next month of the Treasury Select Committee, which believes cards should be made simpler so that consumers can easily compare one card with another.

At present, all borrowers can do is judge a card's value by the annual percentage rate (APR). However, banks calculate APRs using different equations, so two cards with identical rates can cost quite different sums for the same loan amount.

Similarly, it can be difficult to compare interest-free periods, other fees charged on the card, and how cash advances and cheques are treated.

The Select Committee members are believed to favour the introduction of an American-style Schumer box on every statement and piece of promotional literature. This would give a table of all key data relating to the card, such as interest charges, interest-free periods and additional fees in a standard formula which would allow cards to be easily compared.

A Nationwide spokesman said: We believe consumers should be given all the information they need to make an informed choice. You wouldn't expect someone to buy a car without knowing what sort of engine that particular model has, or how much any extras are going to cost.

The Consumers' Association, though, which shares many of the concerns of MPs on the Select Committee, is less convinced that the Schumer box will work. Spokesman Mike Naylor explained: Will people look at this information any more than they do the data which is already available?

This is an issue of grave concern. People are borrowing more than they ever have before. They are coping with these high levels of debt at the moment. But if house prices fell, interest rates shot up or unemployment levels rose we could be facing a major problem.

Competition has been the great success story of the credit-card world, but at the same time its undoing. There are now more than 1500 cards to chose from, and which one is right for you will depend on how you spend money.

If you pay off your bill each month, then a cash-back card will be most suitable, which gives you a refund every time you shop of typically 0.5% or 1%. American Express's Blue Amex card gives 1 % back while the Halifax gives back 0.5% up to 999.99, and then 1% thereafter.

A Goldfish card provides savings of up to 75 off gas bills, or points can be exchanged for vouchers for a range of department stores and big name shops. Those who enjoy travel can opt fare discounts with NatWest airmiles, BAA Worldcard Visa or Thomas Cook's card.

However, if you regularly use your card to borrow, then other features, particularly, the interest rate, is key. But you need to fully understand all the features attached to any piece of plastic.

Comparing interest rates can in itself be problematic because of a move towards risk-based borrowing charges. Not every customer will be offered the published rate for a card, and it is difficult for borrowers to know if they are getting a good deal or being penalised, compared with others.

At Barclaycard, for example, Britain's biggest credit card provider, customers can be charged between 9.9% and 24.9%, depending on how safe the bank believes they are when it comes to paying back. But Select Committee members are also concerned at how difficult it is for ordinary people to understand how much it will cost them to borrow at all these different rates.

Another complexity is that some cards charge very low discounted rates for balance transfers, while on others the cheapest rate is only available on new purchases. Many customers are bewitched by the headline rate only, and fail to realise much of their borrowing will be more costly and, that any money paid off the card settles the debt attracting the lower interest rate of the two.

But the myriad of hidden charges also causes concern. Many of the cheapest cards will levy a 15 to 20 fee for late payment of bills. Fees are also creeping up for cash advances. If you use your credit card to raise money then not only will you pay perhaps 2% commission, but interest also accrues until you settle the bill, even if you pay off in full at the end of the month.

Another new trend is reductions in compulsory minimum monthly payments. Whereas card issuers use to insist that 5% was paid off each month, in many cases this has now fallen to 2%. Naylor said: All of these things combined leads to the impression that credit cards are free money. But in reality, customers are building up debts which may take them years to clear. Tiny minimum monthly payments mean they are not even clearing the interest each month but getting deeper and deeper into debt.

One area over which MPs and the Consumers' Association disagree is the issue of zero-rated introductory discounts. The Select Committee is known to be nervous about these, because they lure borrowers into a false sense of security, which can go badly wrong when the rate then rockets after six months.

Nationwide, Egg, Sainsbury's, Tesco, RBS Advanta and Abbey National are among the banks with zero-rated cards which then leap to between 12% and 18% interest. The committee believes it is wrong for these cards to be described as free, because they are not free, but charge high levels of interest at a later stage and have other fees attached.

But the Consumers' Association welcomes them. Naylor said: We would not want to see anything happen which led to reduced competition. Competition has worked to customers' benefits. Zero-rated cards are fine for customers who understand how they work. The important point is to chose the right card for you.