Credit card interest 'confusing'

The array of different methods lenders use to calculate the interest paid on credit cards is confusing for consumers and makes it difficult for them to shop around, an Internet bank said today.

Egg said lenders used 10 different formulas to calculate how much interest consumers owed on outstanding balances, with payments varying from card to card even if they had the same APR.

It is calling on the industry to adopt a single, standard method of calculating interest to make credit cards more transparent.

The group said that while two cards may charge the same interest rate they might, for example, have different interest free periods or accept repayments at different points during the month.

Egg said that based on this it could charge interest of 22.7% on its credit card and still be cheaper than Lloyds TSB's Advance card which has an APR of 11.9%.

It based the calculation on someone making two purchases, one of £300 and one of £150 spread over two monthly statements.

The consumer only repays £100 of the first statement, but pays off the second statement in full on the due date.

Mark Nancarrow, chief operating officer 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.

Our report exposes a lack of transparency which is contrary to the aims of the current review of consumer credit and does nothing to help create a fairer, more transparent environment for the UK consumer.

Lloyds TSB criticised the group for not comparing like with like.

It said its Advance card was aimed at people who were persistent borrowers and did not clear their balance in full each month. Because of this the card offered a relatively low APR but no interest free period.

Research for Egg found that 81% of consumers thought they would be charged the same amount from two cards with identical interest rates, if they were used in exactly the same way, although this is not the case.

Three-quarters of people thought it was unfair that providers who offered the same rate could actually charge different amounts, and 67% said it would be easier for them to shop around for the best value card if a standard method of calculation was used.

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 1st March, 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.