"Scrap the farcical 'new official credit card APR examples'" blog discussion 8 March 2011 at 1:02PM in Martin's blogs & appearances & MoneySavingExpert in the news 20 replies 3.9K views

Former_MSE_Helen

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's "Scrap the farcical 'new official credit card APR examples'" Blog.

Please click 'post reply' to discuss below.

cse

I think you're getting APR and interest rate confused. "If you borrow £2,000 at 18.9% APR and make the minimum payments it’ll cost you £340 interest in the first year..." doesn't make any sense, as APR by definition includes annual fees. Substitute 'annual compund interest rate' for APR in that sentence and you have some useful information

APR is a blunt implement to enable price comparisons between different cards. I would argue that the problem is not that annual fees are included, but that the likes of 0% intro periods and cashback - both of which make a huge difference to the cost of running a credit card - are not

If anything your proposed wording sounds more suitable as a replacement for the meaningless Total Cost of Credit figures that appear in every credit agreement

JimmyTheWig

I think cards without fees shouldn't have to add anything else than they have previously been doing.
Cards with fees should have to give example APRs based on 3 different spend amounts. Customers can then choose the amount of borrowing most like their own and compare like with like (i.e. what APR is good for) between different cards.

I also think that if they're doing it over a year then it should probably involve paying off the full amount in a year. Again this is only relevant where there is a fee, otherwise 7.9% is still 7.9% whatever you owe.

cse

Basically - mortgages have a 'total cost for comparison' figure which takes into account arrangement fees, length and level of introductory rate, and SVR that it reverts to afterwards. I think that works pretty well

APR tries to do the same thing for credit cards, but the problem is everyone uses credit cards in different ways. They borrow different amounts and pay back over different periods, so the set of assumptions used to come up with a single APR figure is always only going to be truly 'representative' in a tiny number of cases

I'm just not sure that adding more figures is the best way to reduce confusion, and I'm not sure that APR is necessarily the right target in this case

Frankl

I recently applied for a Halifax Clarity Credit Card. The rate was shown as 12.9% (representative).
The offer I was given was 19.9%. This makes the advertised "Representative" rate completely meaningless as it doesn't relate to the true rate.
As I see it any card operator could offer a representative rate of 0% purely to obtain interest and then offer whatever rate that they deem fit once you have applied.
:mad:

cse

Frankl wrote: »

I recently applied for a Halifax Clarity Credit Card. The rate was shown as 12.9% (representative).
The offer I was given was 19.9%. This makes the advertised "Representative" rate completely meaningless as it doesn't relate to the true rate.
As I see it any card operator could offer a representative rate of 0% purely to obtain interest and then offer whatever rate that they deem fit once you have applied.
:mad:

Different issue - there is a requirement that 50% of people who are accepted for the card get the advertised 'representative' rate (down from 66% pre-CCD). So the hypothetical issuer in the example would have to offer 0% to at least half of their new custom

MSE_Martin

cse wrote: »

I think you're getting APR and interest rate confused. "If you borrow £2,000 at 18.9% APR and make the minimum payments it’ll cost you £340 interest in the first year..." doesn't make any sense, as APR by definition includes annual fees. Substitute 'annual compund interest rate' for APR in that sentence and you have some useful information

APR is a blunt implement to enable price comparisons between different cards. I would argue that the problem is not that annual fees are included, but that the likes of 0% intro periods and cashback - both of which make a huge difference to the cost of running a credit card - are not

If anything your proposed wording sounds more suitable as a replacement for the meaningless Total Cost of Credit figures that appear in every credit agreement

Im not getting it confused - that was just an example for non fee cards (the majority) - interesting note about TCC though

jamesd

I do think that there are people who could do with the help to see the effect of charges on interest rates, flawed though it is. We're both able to work out the effect but many people just aren't comfortable with such calculations.

It's something that looks more interesting for mortgages, if it was done over the deal period and full term. It might usefully illustrate the effect of the charges combined with the interest rate. But it'd still need to be customised for the amount borrowed.

Personally there's a declaration I'd like to see for one product: "If you borrow our median loan amount of £3,500 for three years at 7% plus £130 fee we get 35% of what you pay and the people who lend it to you get the rest". That's the deal at Zopa for those with the best credit rating.* Not really impressive for a place pitching itself as a consumer's champion lender that cuts out the middle men.

At least their illustration shows that a fixed 6.6% rate becomes 9.3% APR over three years so it's possible to see that a large chunk of the APR goes to them if you think about it: 9.3% - (6.6% - 1% lender fee) => 3.7% for Zopa, 5.6% for lenders, before bad debt.

*median loan size around £3,500, £130 revenue when it's sold (added to amount borrowed), 1% ongoing lender fee if it's paid over three years is about £55 (mean balance at 7% is around £1827 over the three years, 1% on that times three is £55). Total interest paid £405, lender gets £350, Zopa gets £55 so Zopa's total cut is £185 and 34.5% of all revenue from the loan before bad debt goes to Zopa. Bad debt allowance is 0.5% a year in the A*36 market, £9 total over the three years at average balance. Expected gross-equivalent interest after bad debt for a basic rate tax payer drops to £338 and the Zopa cut rises to 35%. Early repayments are common and increase the cut that Zopa gets, higher interest rates, including in higher rate markets, decrease it.

Gorgeous_George

I'd prefer...

'Borrowing on credit cards for more than a few months is stupid.'

I think APR should include annual fees. Otherwise they are worthless. It would have to be based on the full credit limit available on the card possibly with other options of 20%, 50% and 70% of the credit limit.

GG

alexlyne

'Borrowing on credit cards for more than a few months is stupid.'

Seconded.

Like the people who rack up huge debts are really mathematically savvy to be able to calculate what they owe - or even care about it. Ohh, that's it! When applying for a credit card, people have to work through some maths questions on what they owe if they spend 1000 and don't pay it off for 6 months, or whatever. They get the card when they get the answers right!

oakhouse13

"All credit card product (inc. cards, loans & overdrafts) adverts, marketing and communications are forced to give a specified explanation of what the APR means."

Why do these rules apply to MSE? Journalists writing about credit cards in newspapers aren't including them, why not?

From how this site works:

"Anything that is on the site is here solely because it's the very best way to save money, based on independent, detailed and specialised journalistic research by members of the team. No one can pay to have anything put on this site."

Is the OFT paying to have these rules published on MSE?