Judging The Hidden Costs Of Credit Cards

Recent reports from CreditAction and the National Debtline appear to show that UK consumers are becoming more financially aware and are looking to reduce their levels of personal debt which have spiraled seemingly out of control over the past few years.

Despite the industry wide introduction last year of the "honesty box" in all credit card statements designed to outline the costs of loans and any additional charges, it seems that the activities of some of the financial services, especially certain credit card companies are misleading consumers and making it difficult to determine the true costs of many financial products.

The consumer group Which? (www.which.co.uk) has launched an attack against the interest rates quoted by credit card companies. The problem revolves around the fact that there are around 20 different methods used by lenders to calculate interest charges and these make it extremely difficult for consumers to determine which credit card is cheapest, and have a huge impact on the amount that is ultimately repayable. Which? states that, “if you had two cards with the same interest rate and used them in exactly the same way, one could end up costing over twice as much as the other just because it calculated your interest differently.”

Moneynet (www.moneynet.co.uk) chief executive, Richard Brown, said, “Consumers are led to believe that the cheapest loan is the one with the lowest APR. But this is far from the truth – borrowers should be aware that a loan package does not always do what it says on the tin.”

Martin Coles, editor of Which?, said, "It's ludicrous that a card with a lower interest rate can cost more than one with a higher rate."

Which? cite an example of borrowing £2,800 over a year and then paying in full every four months. With a Cahoot credit card, that has an interest rate of 11.8%, the cost would be £40, while borrowing through HSBC at 13.9% would cost £38 despite the higher interest rate.

Moneynet provide an even starker example. A £7000 loan over five years including PPI, taken out from the RAC at 6.5% when compared with the same loan at 6.7% from the Nationwide could lead to an additional expense of £1,846 over the term of the agreement, despite the RAC having a lower headline rate.

The reason for the problems is that the APR generally used to compare products is simply a measure of the cost of the credit, whilst not taking into account other factors such as add ons like payment protection insurance (PPI), early repayment penalties, or when the card company actually starts and stops charging interest.

Richard Brown states, “This enables them to advertise what looks like a competitive rate to attract customers. Then once the applicant is convinced they have found a great deal, the commission-hungry provider will make every attempt to sell them PPI, thus increasing their margin via the back door.”

The Office of Fair Trading is currently investigating the fees charged by two of the biggest credit card providers, which it claims mean that consumers ultimately pay more for the goods they buy.

Which? has requested that the credit card industry uses one standard way to charge interest so consumers really can choose the cheapest card. However until this happens and a more transparent means of comparing credit cards is implemented across the board, consumers are urged to look beyond the attention grabbing APR and ensure they get all the facts prior to taking out any financial agreement.

Disclaimer: All information contained in this article, is for general information purposes only and should not be construed as advice under the Financial Services Act 1986.

You are strongly advised to take appropriate professional and legal advice before entering into any binding contracts. Useful resources: Moneynet financial comparisons ( http://www.moneynet.co.uk ) Which? consumer advice ( http://www.which.co.uk )

Copyright 2006 Michael Hanna

Michael Hanna is a keen writer, and internet marketer living in Scotland:

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E-mail: samqam@googlemail.com

Phone: 0131 561 2251

Michael's Website: http://www.gransha-taxi.co.uk

This article represents the views and opinions of the author and not of www.dailyindia.com

Barclaycard gets tough on customers

Barclaycard customers who pay their bills in full each month may have their payment date suddenly brought forward, the bank has told the BBC. The move could put customers at risk of incurring a £20 late payment fee if they do not examine their bills carefully each month. This revelation comes amid continued criticism of bank profits and not long after the Office of Fair Trading (OFT) investigation into late payment charges.

However, Barclaycard denies it is trying to rake in late penalties, and says it never guarantees customers a fixed payment date each month. Speaking to BBC Radio 4's Money Box programme, Barclaycard's Ian Barber said any change of date will be explicitly outlined on the customer's statement. He said Barclaycard was "having to face up to the fact that clearly we are not making as much money out of customers that pay their bill in full as we are out of those that borrow", he said. He added that the company was "quite open about it... if you pay your bill in full every month you may get a few days less to pay... "That is the fact of it and we are not going to shy away from that."

Card rates 'causing confusion'

Interest rates quoted by credit card companies can often mislead people, consumer group Which? has said. Which? said the 14 different methods used by lenders to calculate interest charges make it hard for consumers to tell which credit card is cheapest. The consumer group called for a single method of calculation to be adopted.

"It's ludicrous that a card with a lower interest rate can cost more than one with a higher rate," Martin Coles, editor of Which? magazine, said. As an example of the confusing picture facing consumers, Which? calculated it was possible for someone borrowing on a credit card charging a rate of 11.8% to pay more in interest than through a card charging 13.9%.

Last year, the industry started incorporating a so-called "honesty box" in their credit card statements which outline the costs of the loan and any additional charges. On Thursday, the Office of Fair Trading (OFT) announced that it is to investigate the fees charged by Mastercard to retailers. The OFT says that interchange fees - the fee charged between banks for processing a card transaction - are too high. The fees, it said, meant that consumers ultimately paid more for goods. The OFT announced a similiar investigation into Visa's interchange fee last October.