Credit card co.s making £55 million a year by fiddling the figures on APR?

Tirian

While I was drawing up a spreadsheet at work looking at the impact of APR on credit card spending at Christmas, I inadvertently stumbled across a sharp practice by banks and credit card companies that could be making them as much as £55 million a year by manipulating their stated APRs in a very devious way. In fact, so devious that it must at best skim the borders of legality.

It depends on some slightly complex maths, but hopefully I can explain it simply! APR is applied to credit card balances via a corresponding monthly rate, which is worked out via a technical formula (to account for the compounding effect). As I was making my spreadsheet, I decided to test my formula for deriving a monthly rate from an APR, by taking the APR advertised on the Co-Op Platinum card (11.9%), entering in to my spreadsheet and checking the result against the one given on the Co-Op card’s summary box (now required by law).

The Co-Op’s summary box gives the monthly rate as 0.945% - so I was a little bit concerned to see that my spreadsheet indicated that the monthly rate for an APR of 11.9% should be 0.941%

A tiny difference, you might say – but if my formula was correct, there should be no difference at all … unless, it suddenly struck me, the APR that the Co-Op are using is not actually 11.9%. Wouldn’t that be illegal though? Surely they wouldn't be so foolish. This got me wondering – perhaps the Co-Op were being very naughty and manipulating the monthly rate so that it would work out to the highest possible APR that would still round down to 11.9% to one decimal place.

Of course, there’s an easy way to check … work the sums out backwards, and calculate what APR a monthly rate of 0.945% actually amounts to. Would you know it, that monthly rate produces an APR of 11.948% !!! The merest speck of a smidgen below the point at which it would have to be rounded up to 12% rather than 11.9%.

Now, why does this matter? Well, these cards are advertised on the basis of their APR, but the interest is actually applied using the monthly rate. As such, the monthly rate ought to be calculated from the advertised APR – rather than the other way round. After all, the APR is an arbitrary rate that is set by the lender – so if they are stating that it is 11.9% then there is no earthly reason why it should not be exactly 11.9%

The difference might not be much to each individual – over a year, it works out at about £1 extra for someone paying off a £1000 balance. However, when you take into account that the total outstanding credit card debt in the UK is approximately £55 billion, that works out to about £55 million a year that is being raked in by effectively hiding an extra 0.05% APR … and I am willing to bet that every card uses this trick.

I am also willing to bet that, they have rounded the monthly rate to down to the 3 decimal places they show, and if you could see the actual figure that they apply it would almost certainly produce an APR of more like 11.9499999… %

Now ...I know that the letter of the legislation probably allows this, no doubt via some clause saying that 1DP is an acceptable level to set APR to. HOWEVER, surely "treating customers fairly", as these companies are supposed to do, should imply that if they advertise APR at a certain rate, then the monthly rate at which it is actually applied ought to be calculated from the exact APR that they advertise? Just a thought!!

jonesMUFCforever

Well let us know when you win in court otherwise wake me up some time. I sorted drifted off after the first paragragh.

jamalfatty

Whatever job you have that allows you enough free time to come up with and post all that, I want!