Time for credit card issuers to tell you the truth about what you are paying

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It could not have come at a worse time for the credit card companies. This week, just as Christmas spending was reaching its seasonal climax, the House of Commons Treasury select committee published a report damning the card issuers for lack of transparency, irresponsible lending and charging excessive rates.

The committee said consumers had been "badly let down" by card companies whose lack of transparency left customers confused about charges and unable to shop around. The card companies' marketing practices were "highly misleading and highly damaging" to the interests of consumers, and could lead to people sleep-walking into debt.

The report said it was wrong to have two ways of calculating annual percentage rates (APR) of interest, showing how much interest is charged, and 10 ways of calculating charges on cards, making it difficult for consumers to know if they were getting a good deal. And lack of transparency stopped competitive pressure working properly, so interest rates could be very high.

The committee said the regulatory regime governing credit and store cards was from a "bygone age" and had not kept up with changes in the market. The Department of Trade and Industry had been busy launching consultations but had not acted, and the Office of Fair Trading had been passive.

John McFall, chairman of the committee, said: "Consumers have been badly let down by credit and store card companies. During December, the Christmas period, £13bn is expected to be spent on credit cards. Consumers are good for the industry, but the favour is not returned."

The report called for a single method of calculating APRs, as planned by the Government in its consumer credit White Paper, and standardising the way interest charges are calculated.

Although the industry was committed to introducing a summary box, the committee wants the box to be included in people's monthly credit card statements, along with information on how long it would take them to repay debt if they made only the minimum payment each month.

Mr McFall suggested examples should be developed, setting out the cost of different cards according to user and repayment patterns. And he called for an end to the situation where consumers do not know what rate they will be charged on a card until it is issued because of so-called risk-based pricing, where an applicant is told his or her rate of interest based on the card issuer's assessment of how risky they are.

The committee wants a limit to be placed on unsolicited increases in consumers' credit limits, unsolicited credit card cheques to be banned and views of people's ability to repay to be based more on their overall income and other credit commitments and less on repayment history.

Mike Naylor, senior researcher at Which?, said: "This is great news for consumers and throws light on the opaque credit card market. We hope the verdict will force the industry and regulators to drive out the underhand practices used to hoodwink its customers. With the review of the banking code in 2004 and the White Paper on consumer credit, there is a real opportunity to make the committee's recommendations a reality."

The Consumers' Association welcomed the report and called on the industry to take urgent action to improve consumer understanding of credit card charges. The CA is particularly pleased by recommendations for summary boxes on all credit card statements, for unsolicited credit card cheques to be banned and for action to be taken on the many ways the industry calculates interest.

The 10 methods of charging Which? exposed in the credit card market led to huge variations in interest paid, despite using the same APR. Which? calculated the cost of making purchases and repayments over two months, using a standard APR of 18.9 per cent for each method. The interest varied from £5.50 charged by Egg, HSBC and Intelligent Finance to £9.54 charged by Alliance &Leicester Diamond Card, Lloyds TSB Asset Advance and Bank of Scotland One Visa.

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