Consumers 'unaware of APR discrepancies'

Sandra Haurant

Complexities surrounding credit card costs are continuing to flummox consumers, according to research published today.

The research, carried out on behalf of Egg by the Isaac Newton Institute at Cambridge University, showed just how difficult it is to compare credit cards using annual percentage rates (APRs).

Several different methods are used to calculate APRs, and these can result in vastly different costs for borrowers, even when headline rates of interest appear to be the same. Using a straightforward scenario to compare costs, a study found that the Egg card, with an APR of 13.9%, and the Halifax Once card, with an APR of 9.9%, would actually cost a borrower the same amount in interest charges. Meanwhile, a Lloyds TSB Advance card, with an APR of 11.9%, works out more expensive than Egg, despite its APR being 2% lower.

Further research has revealed that consumers remain unaware of these discrepancies. Perhaps unsurprisingly, some 81% assumed that two cards advertising identical interest rates and used in exactly the same way would result in the consumer paying the same amount in interest charges.

Meanwhile, in a "mystery shopper" exercise, researchers discovered that card providers were woefully inadequate at explaining to customers how their interest rates worked.

Researchers were told to enquire about each provider's method of interest calculation and how they applied this to their cards. Almost half (48%) of researchers said the information they received was unclear, while some 46% said that, at the end of the exercise, they felt they understood how the rates were calculated. Worryingly, though, once the responses to researchers' queries had been analysed, it emerged that the information they had received was "incorrect in every case without exception, leaving the mystery shoppers in many cases with a false sense of security and a complete lack of understanding of the potential costs of that particular card".

Mark Nancarrow at Egg said: "Different methods of calculating interest allow providers to subsidise and suppress the upfront APR that they are advertising, creating an illusion that they are offering a better deal than is often the case."

Mr Nancarrow added that the differences in charges and calculations went against the spirit of measures to be implemented following the Treasury select committee's harsh criticism of the industry. One such measure, to be brought in by March this year, is a summary box to be included in literature, containing simple, easy to understand information about charges and costs.

Liberal Democrat Treasury spokesman Vince Cable said: "How can we make sensible choices about borrowing, if the way we are charged interest is so confusing? Even after the introduction of the new 'summary box' for all credit card promotional material on March 1, consumers will remain vulnerable.

"There is now a heavy responsibility on the government and the Office of Fair Trading to get to grips with this issue by standardising the way interest rates are calculated so that APR can actually be a meaningful method of comparison."