David Prosser: Lenders pull every trick in the book

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The Independent Online

Personal Finance Editor

Who wouldn't want to run a credit card company? From the outside, it might look a tough job right now. After all, lenders are reporting mounting levels of bad debt - essentially because they've lent too much money to people who were never going to be able to afford to repay it.

Then there's that irritating ruling from the Office of Fair Trading (OFT). This spring, the regulator told lenders they were breaking the law by imposing penalty fees of £25 or more on customers who breached borrowing limits or paid bills late. It ordered lenders to cut such charges to no more than £12.

Happily, however - assuming you make a living from selling plastic - there's a simple solution to such problems. You simply rack up the interest rates your borrowers have to pay.

Moneyfacts, the market analyst, says this is exactly what lenders have done. It reports that 19 lenders have raised rates since the OFT ruling in April.

To be fair, the Bank of England raised base rates in August. But that 0.25 percentage point increase does not begin to justify some of the increases imposed by credit card lenders.

Barclaycard, Britain's biggest card provider, has put the rate up on its Simplicity Platinum card by an astonishing 12.1 percentage points. American Express has added 6 percentage points to the cost of its Platinum Amex card, while Halifax is charging 5.4 percentage points more on many of its cards.

Many lenders are being sneaky, jacking up the cost of interest on cash withdrawals made on credit cards. The headline rates that lenders advertise are often much lower than the rates they charge on cash, so this is a good way of raising money on the quiet.

Co-operative Bank, for example, has put the cash rate up by 6.7 percentage points on its Gold Base Rate card. Mint's cash rates are up 5.5 percentage points, while Smile is charging 4.7 percentage points more.

For a short time, credit card borrowers had lenders on the run, exploiting introductory 0 per cent deals by switching debt from card to card and never paying interest. But lenders have fought back, introducing transfer fees on such switches - and now by slyly increasing their interest rates.

This industry also has one final trick up its sleeve. Lenders have cut the minimum repayments that borrowers must make each month. Moneyfacts says 3 per cent or more of the outstanding balance was the norm in 2001, but today less than a third of credit card lenders require you to pay so much.

You might think this seems generous. But what it actually means is extra interest charges. On a £1,000 balance, say, with a card charging 14.9 per cent a year, it would take 11 years and five months to be debt free, with charges of £545.33, assuming 3 per cent monthly repayments. Cut the monthly repayment to 2 per cent and the term leaps to 19 years 7 months, at a cost of £1,116.01. Credit cards are a mug's game - and I don't mean for the lenders.

One reason why credit card lenders - and so many other financial services companies - get away with such tactics is the woeful lack of financial education in this country. So a new course from the Open University is welcome.

You and Your Money, a distance learning course, covers pretty much everything that students need to know in order to improve their household finances.

The first tutorials begin next month and the OU says 600 students have already enrolled. But there is just one problem. The fee for the course is £295.

No doubt that represents good value, but it's likely to put off many of the people who would most benefit from this sort of study. A case for Government subsidy, perhaps?

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