Credit card charges are as clear as mud

Melanie Bien reports on how one piece of plastic offering the same interest rate as another can end up costing you more
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Choosing a credit card should become simpler in future, with the Department of Trade and Industry (DTI) due to set out plans later this week for a more transparent regime.

But unless the DTI standardises the way in which credit card providers calculate interest charges, consumers will be no better off, warns internet bank Egg.

A recent inquiry by a Treasury Select Committee highlighted the complexities of calculating annual percentage rates (APRs). Part of the problem is that there are around a dozen different ways of doing the calculation, so cards with identical APRs might not actually cost the same.

Yet most consumers are unaware of this. A recent survey of 1,000 people by ICM Research, on behalf of Egg, revealed that 81 per cent thought that if two different cards with identical APRs were used in the same way, they would always be charged the same amount of interest.

"You would not expect two petrol stations, advertising petrol at an identical price per litre, to charge significantly different amounts for filling up the same car," says Mark Nancarrow, Egg's chief operating officer. "Equally, when choosing a credit card, you might be forgiven for believing that two cards with identical APRs would charge the same interest ... if the cards were used in exactly the same manner. Unfortunately, this is far from being the case."

If you don't know there are different ways of calculating the APR, you can't make proper comparisons of cards to find the best deal. Consumers may be spoilt for choice, with some 1,300 cards available, but we still don't have enough information to make an educated decision.

The importance of getting the best deal shouldn't be underestimated, either: if everyone switched to a cheaper card, the DTI estimates that it could result in a saving of £400 per household.

Egg commissioned Dr Robert Hunt, deputy director of the Isaac Newton Institute at Cambridge University, to investigate the different methods of calculating interest. In his report, released last week, he concludes that a consumer would have to dedicate a lot of time and effort to reviewing the legal and technical jargon before attempting to work out and compare the "true" differences in cost between two seemingly identical cards.

The difference can be startling. In the example shown in the table, a customer makes one purchase of £300 and another of £150 on his card. These are spread over two monthly statements. The customer repays part (£100) when he gets the first statement and the remainder in full on the due date of the second statement.

A Lloyds TSB Advance customer would end up paying over £2 more interest than an Egg customer, even though the APR is 2 per cent less. And the Advance card would have to cut its APR to 7.4 per cent, if it stuck to the way it currently calculates interest, in order to make it as cheap as the Egg card, which has an APR of 13.9.

To make matters more confusing, some providers offering several cards use different APR calculations on each one. The report reveals that Lloyds TSB, HBOS, Royal Bank of Scotland, MBNA and Abbey all do this.

Card providers have already committed themselves to providing summary boxes on customers' monthly statements, spelling out what the APR is. But Egg doesn't believe this goes far enough. "Unless you understand the way in which interest is calculated on different cards, you will never be able to assess their true cost," warns Mr Nancarrow.

Website allows you to compare 300 of the cards on the market. Stuart Glendinning, director of credit cards, advises people to do as much research as possible. "As the market becomes more competitive, it also becomes more complex. Thus there is a greater need for customers to become more vigilant to assess the terms and conditions of any particular offer."

Consumers worried about debt should choose a card charging 0 per cent on balances for an introductory period and aim to clear what they owe within that time. If this is unlikely, Capital One charges 3.9 per cent until the balance is cleared.

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