What price APR on your credit card?

Egg reckons it could raise its interest charge to more than a whopping 22% and still cost users less than rival LloydsTSB, which claims its rate is less than 12%.

The full extent to which credit card companies deliberately confuse customers is revealed by Egg in a report that shows that in one simple scenario, Egg’s credit card could charge 22.7% interest and still be cheaper than Lloyds TSB’s Advance card, which claims to charge only 11.9%.

Egg maintains that using its current method of calculating interest, the Lloyds TSB Advance card would have to cut its APR to 7.4% before it was as cheap as the Egg Card, which charges 13.9% APR.

The news comes after credit card bosses were criticised last week by the Treasury Select Committee for dragging their feet on reforms that would make it easier for credit card customers to compare charges and fees on different credit cards. The Committee wants to see a summary box setting out how charges are levied with a simple illustration.

The Egg report reveals that four out of five of us wrongly assume that two cards quoting the same APR will cost the same if used in an identical fashion. This is not the case because the companies use different methods of calculating the APR even although a strict formula is laid down in the Consumer Credit Act. And depending on the dates from which interest is applied and the method of applying it, two cards with the same APR can have widely different charges for the same transaction.

'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,' explains Mark Nancarrow, chief operating officer of Egg. 'This surely does not embrace the spirit of the Summary Box,' he said.

'Simply presenting what will be - by necessity - a complicated and technical explanation of the method of interest calculation will only lead to further confusion. Standardisation, on the other hand, will arguably create a level playing field, increasing competition by forcing providers to compete on key features such as price — all of which could and should be embraced within the Summary Box.'

Mystery shopping research carried out by Egg revealed that although some of the researchers thought that they did understand how interest was charged, feedback revealed that they had been mislead.

The exercise found that almost half of shoppers felt that the information provided by the five card companies on interest calculation methods was difficult to understand. Despite this, 46% of the researchers finished the exercise feeling they knew how interest was calculated.

Following detailed feedback from each researcher it became clear that not a single mystery shopper was given any form of explanation of how interest is actually ‘calculated’, but was simply provided only with simplistic information on the APR - and often incorrect information about the monthly rate.

'The reality is that the information with which they were provided was incorrect in every case without exception, leaving the mystery shoppers in many cases under a false sense of security and a complete lack of understanding of the potential costs of that particular card,' says Nancarrow.

In the report Egg asked Dr Robert Hunt, Deputy Director of the Isaac Newton Institute at Cambridge University, to investigate the different methods of calculating interest and to assess how difficult it is for the average consumer to compare between them. He concluded that it was virtually impossible and that depending on which method is used, costs can vary significantly.