Beware credit cards that play the joker

They tempt you in with a low 'headline' rate but you end up paying a higher one. Read between the lines, says Sam Dunn

A credit card with an annual percentage rate (APR) of 28.5? That doesn't sound like Asda price. Yet the supermarket famed for chirpy jingles and good value is piloting this costly rate in 30 towns for customers judged a poor credit risk.

But the headline rate for the new card - the one potential customers will see in promotional material - is not 28.5 per cent but 13.9, which isn't bad compared with the high-street lenders, though still three percentage points higher than the best. Asda is also offering 0 per cent on balance transfers for an introductory period of six months.

Once the introductory offer ends, many Asda shoppers will qualify for the lower headline rate. But, as with other cards, you'll first have to jump through its credit-check hoops.

The card, which is set to be rolled out nationally next year, is the latest to feature risk-based pricing. Instead of a lender rejecting someone because, say, they have a record of missed payments or a county court judgment against them, it will give them a credit card but charge a higher rate of interest to reflect the extra risk it is taking on.

Many banks use low headline or "typical" rates to tempt people to apply in the first place. Only when customers get their cards do they find they haven't qualified for the cheapest deal. Instead, they are being charged a much higher rate.

Card providers are allowed to advertise the lowest rate on offer as long as 50 per cent of customers actually get this. But this rate has the potential to be misleading, which is why proposals have been included in a Department of Trade and Industry White Paper on consumer credit to raise this figure to 66 per cent.

At the moment, card firms can find themselves ranked high against the competition for their attractive offers even if half their customers aren't paying this rate. Halifax's One Visa card, for example, regularly tops the "best buy" tables with its 0 per cent introductory offer for nine months on balances and transfers, before it reverts to a standard APR of just 9.9.

But if your credit reference is a bit shaky, you may end up with an APR of 18.9 instead. The same is true of Barclaycard, which has a standard APR of 14.9 and a far higher 24.9 for riskier customers.

Those who support risk-based pricing defend the practice by arguing that borrowers with bad track records can still get credit at a reasonable rate. Asda's 28.5 per cent deal isn't cheap but the Vanquis credit card, backed by Provident Financial, charges up to 65 per cent.

However, critics argue that risk-based pricing undermines transparency and makes it impossible for people to compare rates accurately. While the Consumers' Association (CA) is cautiously in favour of the practice, it remains concerned that consumers struggle to understand the increasingly complex UK credit card market.

Some providers are even offering customers the chance to design their own plastic. Last week, insurer More Th>n introduced a DIY credit card that lets users pick a mix of APR, fees and cashback to suit them. If you opt for a low APR, for example, you will face a higher annual fee.

To make matters more confusing, what deal you actually get will depend both on your credit reference and where you go for the card. People with a poor record may be rejected by one lender only for another to welcome them with open arms and a juicy credit limit.

"Every company sets its own credit-scoring system," says Mike Naylor at the CA. "They might look at how often you've moved and the number of card applications, along with your salary, homeowner status and any missed payments."

If your application is turned down, you should check your credit file: apply online at credit agencies Experian or Equifax for a £2 fee and challenge anything you don't understand or think is wrong. And when applying for a card, check the myriad costs and fees and ask how much you'll be charged for missing payments or overspending.

If you need help dealing with debt, try www.adviceguide.org.uk or www.nationaldebtline.co.uk as a starting point. Other contacts: www.experian.co.uk, www.equifax.co.uk