Credit card holders hit by 'hidden' rates

Investigation finds lenders ignore guidelines and don't publish true APRs for some customers

Consumers looking for a new credit card may end up with an APR 9 per cent higher than advertised rates, due to the widespread use by banks of highly secretive "risk-based pricing", according to latest research.

Halifax, Barclaycard and NatWest are among major card providers who employ risk-based pricing to determine the APR they offer applicants. This practice employs credit scoring to decide what rate of interest a particular customer will pay. The more risky a bet you are seen to be, the higher the interest rate you pay.

Financial information service Moneycomms, who conducted the research, found nine major lenders use the risk-based pricing model in credit cards.

Halifax has the largest difference between the representative rate and the highest, risk-based APR, with two of its card products having a 9 per cent surcharge, making its maximum APRs of up to 25.9 per cent the highest of all providers in the research.

Halifax justified its high charges by saying that: "In more than half of all applications customers will receive 'the best' advertised rates."

However, this means that Halifax is only doing the bare minimum according to current EU and UK laws on credit-card rates.

Under these laws, the representative APR has to be exactly that: representative of the rate offered to successful applicants, with 51 per cent of those securing credit receiving the rate. And it must always be displayed in advertisements.

While the European and UK regulations are clear about representative APR, it is not so explicit over the "standard information" that lenders should make available to consumers pre-application and in particular these risk-based rates.

Most lenders follow the guidance of the UK Cards Association and disclose these risk-based rates in a summary box for new applicants.

However, an IoS investigation has found that some lenders do not publish their risk-based rates at all, leaving consumers potentially in the dark over the rate they are likely to receive. Barclaycard, probably the UK's most high-profile credit-card company, is one such lender, an approach criticised by consumer group Which?

"This means that consumers don't always know what rate they will be charged until they apply, which makes it harder to compare rates and shop around, and can have a negative impact on their credit report if they decide to cancel the application," a Which? spokesman says.

In response, Barclaycard – despite the fact that it is going against the industry norm – claims that its approach is actually better for customers. A spokesman says: "We believe that rather than supplying a large range of possible rates at the point of application, this [providing all rates after application] is the most transparent way to offer our products.

"Customers are never in any doubt as to the rate they will receive; if a customer isn't offered the rate applied for, we provide complete details on the alternative and keep this offer open to them for 90 days so they can compare against other products available from our competitors."

But this can leave consumers who choose to go elsewhere after the true cost of credit is revealed to them with a damaging imprint on their credit file.

Which? says: "We want banks to give consumers a better idea of the rate they are likely to be offered before they submit a full application, and use 'soft' searches that don't affect a customer's credit rating."

Andrew Hagger of Moneycomms concludes we need greater transparency in the industry or else consumers could find themselves in the rate line of fire. "The full range of rates should be visible to consumers before the application process begins, otherwise it gives the lender a free rein to charge far higher rates than its rivals without anyone but the applicant being any the wiser," Mr Hagger says.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

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