Consumers face an interest- rate lottery in the ongoing tightening up of the credit-card market. Providers are handpicking borrowers with a squeaky-clean credit record, offering them the advertised top rates and leaving the rest to tackle higher rates or rejection altogether.
"The credit-card market in effect has three tiers," explains David Black, a banking expert at the analysts Defaqto. "Those who have an excellent credit rating who can pretty much take their pick from the best deals available; those deemed to have lesser credit scores who – if offered a card – may well find that the interest rate they're offered is higher than the typical APR; and those whose applications are rejected," he says.
The process of finding a credit card with an affordable rate is now a minefield, with many companies increasing their annual percentage rates (APRs). Since the beginning of this year, for example, MBNA upped the interest rates on its Platinum and Platinum Rewards cards by 1 per cent to 16.9 per cent, while Barclaycard increased its Platinum Simplicity card by 1 percentage point to 7.8 per cent and its credit repaid Initial Visa card by 2 percentage point to 29.9 per cent.
To complicate matters further, more companies are adopting a strategy known as "'risk pricing" to determine who gets the best rates. The average credit-card rate for new customers today stands at 18.6 per cent, and although many advertised rates are appealing, the reality is that lots of applicants will end up paying much more.
Risk pricing works by assessing an individual's details, credit record and repayment history to set the interest level.
Legally, credit-card providers must offer the advertised rate to at least 66 per cent of all successful applicants, but something as simple as a late mortgage payment can affect your credit score and ruin your chances of getting the best rate.
So just two thirds of successful applicants will get the lowest rate because they have excellent credit scores and a proven track record of good credit management.
"The remaining third of customers accepted are likely to be those who will have good credit files, but may have had minor blips in the past, or those who haven't had a credit card in the past," says Michelle Slade, from financial comparison site Moneyfacts.co.uk.
There are three key sources used for this assessment; the information given on the application form, such as job and salary details; the credit report by one of three credit reference agencies (Equifax, Experian, and Callcredit); and, finally, any information that companies might already have on existing customers.
The difference between the various rates on offer can be stark. Summary boxes will often only detail the typical APR rather than list the additional rates that may be offered. The Capital One Plus credit card pays a typical APR of 14.9 per cent, but may also offer applicants a massive 24.9 per cent. Similarly, Tesco's Clubcard Credit Card advertises a rate of 16.9 per cent but up to one third of applicants could be offered a rate as high as 19.9 per cent.
Existing customers can also be affected by risk-based pricing because credit-card companies can change the rate of interest they charge at will. In March, for example, Egg customers faced hikes of up to 5 percentage points.
Overall, few credit-card companies want to increase their unsecured lending. Instead, many are focusing their attentions on existing customers. For example, HSBC and Natwest/RBS are only offering credit cards and unsecured loans to current-account holders. Much of this is down to the fact that providers have faced several hits on their income streams, including increased fraud, bad debt and the drying up of money from payment protection insurance (PPI) sales.
Mr Black says: "It's pretty inevitable that the credit-card deals available will become less attractive in the future, with increased or new fees and charges, higher interest rates, fewer and shorter introductory deals and less attractive rewards."
A crucial problem is that submitting several applications in a short space of time has a negative impact on your credit score. Therefore, before applying for a credit card, consumers should check whether the provider offers a flat rate for everyone accepted, or a rate dependent on the credit score.
Today, just under a quarter of the cards on the market use risk-based pricing, but this number is on the increase. Providers that use this strategy include Egg, Halifax, HSBC, M&S Money and Sainsbury's Finance – but there are still several big providers that don't use this strategy and the good news is that many of these have some extremely competitive deals, including the Co-operative Bank, MBNA and Barclaycard.
However, simply opting for a card with a flat rate won't guarantee acceptance. Credit scores are always taken into account so consumers may still be declined on that basis.
Even without the problem of higher rates, many consumers face outright rejection based on the checks.
It may even be that a provider using risk-based pricing is more likely to accept an application, albeit with a higher rate, which may be preferable to being rejected altogether.
"Cards without the tiering of rates based on credit score will either accept you if you meet their criteria or reject you – there is no middle ground," says Ms Slade.
To make life even more difficult, credit-card companies will not necessarily score an individual in the same way. "Scorecards are different for different lenders, so it's not unusual for one lender to say 'yes' and another 'no' to the same applicant based on the same information," says James Jones, from Experian.
The best thing consumers can do, therefore, is to ensure that their credit score is as good as it can possibly be. Dealing with existing credit correctly is crucial, by paying monthly bills in full and on time.
Closing any unused credit cards sitting in your wallet can also improve the chances of a successful application, and it is also advisable for consumers to send for a copy of their credit report and check for any mistakes. These reports cost around £2 from each of the three credit reference agencies.
James Jones, Experian
"Every monthly payment is logged on your credit report; missed payments count against you. Check your report regularly; make sure discrepancies are rectified. Always register to vote at your current address.
Ensure past bad debts are repaid; explain mitigating circumstances. Review financial links to other people; remove them if out of date. Investigate credit refusals and avoid repeated applications.'