Banks admit credit rates are confusing

Consumer groups are hopeful that the inquiry into credit cards, being carried out by the Treasury Select Committee will result in positive benefits for card users. The Committee finished hearing evidence yesterday.

Credit card holders have long complained that they cannot understand the way card issuers calculate interest charges, that penalties for minor infringements of terms and conditions, such as late payment charges are unfair, and that credit card contracts are too one-sided in favour of the lender.

At the moment the banks deliberately confuse customers by using a wide range of methods to calculate interest charges and it is impossible for cardholders to know whether one card is better value than another. A card advertising a lower rate of interest can actually cost more in credit charges than one with a higher APR.

In evidence to the Treasury Select Committee the banks have admitted that interest rates are confusing for consumers. Michael Geoghegan, chief executive of HSBC, and Shane Flynn, chairman of MBNA Europe, agreed that it was not fair that consumers face different rules when dealing with different lenders.

This move was welcomed by Which? (formerly the Consumers’ Association) and there is now a real possibility that the committee will recommend a standard formula for calculating interest.

‘There finally seems to be general acceptance among lenders that the different rules to calculate interest rates are unfair and means that their customers cannot accurately compare cards,’ said Laurence Baxter, senior policy advisor at Which? ‘The only solution to this grand stealth rip-off is industry-wide standardisation of the way credit-card interest is calculated.’

The banks have opposed such a move on the grounds that it would reduce competition but Baxter pointed out that, ‘contrary to industry gripes that such a move would ‘straight-jacket’ competition, standardisation would actually result in people really being able to compare APRs and know how much they’d be paying. This in turn would encourage switching, which would lead to greater competition.’

The banks have suggested that the method of interest calculation should be put in a ‘key facts’ type box. But it is unlikely that consumers would be able to follow the complex formulae applied.

‘Putting interest calculation information in to a summary box is not the solution that lenders are touting it to be,’ said Baxter. ‘Adding the complex and often unintelligible details on how interest is calculated would cause further confusion and would not help people compare cards.’

The National Consumer Council criticised the banks for making it too easy for vulnerable individuals to get into debt - in particular the practice of automatically increasing credit limits when a cardholder has reached their maximum borrowing. The NCC is calling for the Banking Code to be more stringently enforced, where credit cards are concerned.

‘Eight out of ten consumers think credit limits should only be increased at the customer’s request,’ said Claire Whyley, deputy director of policy at the NCC.
‘We want to see next month’s Banking Code enforcing tough measures on lenders to be responsible and address, in particular, the problem of offering unsolicited credit without first assessing the customer’s ability to repay.’

‘Vulnerable consumers – including those that are at or above their credit card limit or only ever make the minimum repayment - should not be sent unsolicited offers of further credit. Consumers should be given an opportunity to ‘opt-out’ of unsolicited credit offers so that they have greater control over their borrowing,’ Whyley said.