Are Egg guilty of misrepresentation of a 0% APR?

I have been an Egg customer since very soon after they launched.

For me, 2006 is the last anniversary 0% Balance Transfer offer according to their terms for customers of my vintage.

But because they have applied an uncapped 2.5% "handling fee" this year, the offer is no longer 0% APR, it's 6.1% by my calculation if I manage to borrow for the full 5 months, and even greater if I don't. If I am slow off the mark and do the transfer at the end of the anniversary month and not the beginning, I calculate the APR as some 7.7%.

This gets up my nose to such an extent that I have returned here to ask the question.

Replies

  • Joe_BloggsJoe_Bloggs Forumite
    4.5K Posts
    @Peterbaker
    I remember many of your considered posts. I was in the same position and there were a few calculations that came to the same conclusion that a 0% headline offer was, as you had stated in your post. I have closed my egg 'green' card and kept the egg 'money' card. I don't think that the general population realises how to evaluate a one off fee in a 0% deal. I being one of them.
    J_B.
    Is this an internal rate of return issue ? How do you model the problem ?
  • Joe_Bloggs wrote:
    I don't think that the general population realises how to evaluate a one off fee in a 0% deal. I being one of them...
    I agree. Most of the population do not have a very good grasp of maths despite the apparent 98.1% GCSE pass rate!
    Is this an internal rate of return issue ? How do you model the problem ?
    I wouldn't know an internal rate of return issue if one flew up and struck me in the face, J_B!

    As for modelling the problem, I use my trusty Microsoft Windows calculator in scientific mode. I am going to make a maths lesson out of it in case some other readers are interested. I warn you all however, I am no teacher!


    To get an APR from a 5 month PR then I think you need to convert the original 102.5% result by raising it to the power of 12/5.... "Oh right, yeah".

    What do I mean?

    Well try this step by step (apologies to those who know it already):

    1. Click Start/Run and type calc and hit OK. This opens Windows calculator.
    2. Click View and Scientific (if Scientific mode is not already selected). This exposes some of the more exotic functions available on a scientific calculator.
    3. Then I type 1.025 in my Windows calculator (for those who are not familiar with simple decimal representation of percentages, 1.025 = 102.5%)
    4. Then I click the x^y key on the calculator.
    5. Then I type (12/5) and then
    6. Finally I click =
    and the answer I am looking for appears, but not all will recognise it.

    I imagine I may have lost many readers at the end of stage 2.

    So I will try to explain from that point:

    ...you've opened the calculator in scientific mode and very colourful it is too! ... but how is it used here? ... first a few assumptions:

    ...how might you tackle this fangled problem?

    Well it is actually quite straightforward to get the rough answers I gave in the first post, and only takes a few clicks. I guess the hard part is knowing how to convert what you know about your problem into a number to start with, and then how to convert the number you get as an answer into the bad news you feared!

    Rather than pitch straight in with algebra, many people find working through a problem with a familiar example of some fixed amount is the easiest way to visualise what is happening:

    If you borrow £100 from Egg under their 0% (sic) anniversary offer, and don't want to get hit with 15.9% thereafter, your account will first be debited with £102.50 (including the 2.5% fee), but you must make damn sure you pay it back before the deadline or you will get clobbered.

    Keeping it simple, you know you must pay it all back by the end of the 5 months in order to cut loose without getting stung by higher rates.

    In other words you will pay back 102.5% of what you borrow, but you've only borrowed it for 5 months. That's not even half a year. The problem is that the 2.5% cost of borrowing which you know about needs to be annualised so you can get a better idea of the TRUE cost of borrowing - what you need is the "APR" (the Annual Percentage Rate) associated with the deal - that's the main problem we are trying to solve here because Egg haven't told you, have they?

    Complicating all this is the fact you will have to pay some of what you borrow back monthly. That's another story and makes the actual APR even worse! (maybe that's what you you were wondering about with your "internal rate of return" description, J_B).

    I'm going to skip that complication, because I judge that it is fairly insignificant over a payback period of just 5 months, and you'll just have to trust me on that. Someone else can work out that bit, but I think it is small beer compared to this damn "handling fee" Egg has whacked on this year.

    There is one other hidden cost though, which has just occurred to me. It is this: if I was daft or desperate enough to accept Egg's anniversary offer this year and to agree to their 2.5% fee, Egg might then charge "Merchandise Interest" at 15.9%APR (=1.24% per month) on that fee because they don't treat the fee as part of the "0%" deal! Oh no, not when they can fiddle it to squeeze even more out of you unsuspecting punters!

    How is that? It's because when you pay them each month, they almost certainly allocate your monthly payments against the cheapest outstanding part of your loan (the "0%"), so you are actually paying them back early some of the money they've lent you at "0%" whilst not actually paying off any of the associated fee that you in fact borrowed at 15.9%APR!!

    What I have just described in that last paragraph actually equates to a further 0.4% APR (15.9% x 2.5%) on the whole deal! That IS significant! So as of this post, I am now suggesting Egg are actually charging between 6.5% and 8.1% for their so-called "0% anniversary offer" PLUS the extra bit I mentioned earlier which I haven't even calculated!

    It beggars belief, does it not? And all of this is under a headline banner of "0% anniversary offer". Yeah right.

    Anyway back to my original calculation. After I'd opened up Windows calculator in scientific mode, how did I get that answer of 6.1% in my first post? Here's how:

    3. I typed in 1.025 in my Windows calculator (for those who are not familiar with simple decimal representation of percentages, 1.025 = 102.5%)

    4. Then I clicked the x^y key in the calculator,...

    "Woa! What's that x^y key?" many of you may be wondering...

    x is the number that I started with (1.025) and y is the power I am going to raise it to.

    "Pardon me?"

    In this case where I want to convert something I know about a 5 month deal into a number that might mean something for a 12 month deal I will choose my "y" to fit the problem:

    y will be 12 divided by 5. (I already know what I must pay back in 5 months - 1.025 or 102.5% of what I originally borrowed - but I want to know what it would be if I "annualised" the deal i.e. the 12 month solution.

    What is the effect of raising something to the power of 12/5?? Well, it sounds complicated, but actually it is just a little bit more than raising something to the power of 2. "Oh really?"

    Well raising a number to the power of two is something which we might all recognise as "squaring" it, or multiplying the number by itself. If Egg's deal was for 6 months and not five then that's what I'd be doing here. I'd be raising 102.5% to the power of 12 divided by 6 (12/6) which is 2. 1.025^2 is 1.050625. But the problem is not a 6 month deal, it's 5, so...

    1.025^(12/5) we would expect to be a slightly bigger number, and for those of you who have jumped ahead you'll see it is a very long number on the calculator which starts 1.0610534...

    How did I get that? Well because I don't want to make a mess of my calculation by raising to the power of the wrong number, I need to put the 12/5 in brackets to make sure that part of the sum inside the brackets is calculated first by the calculator.

    5. So I type (12/5) and then
    6. I click =

    And hey presto 1.061... appears as my answer.

    I know 1.061 is exactly the same thing as 106.1%. That's what I'd have to pay back if I borrowed Egg's money at the same terms as their "0% anniversary offer" for a whole 12 months (if they let me and if I was daft or desperate enough).

    And it doesn't take a rocket scientist to see that 106.1% of the borrowed amount would be 6.1% more than the balance transfer amount I had agreed a year previously. So the APR is 6.1% (ignoring the fact that I would have had to have been paying back a minimum amount every month).

    If I am late in accepting the "0%" anniversary offer, and leave it till the last day of the anniversary month in which I qualify, I'll only get the "0%" deal for 4 months.

    So to work out an APR for that, I type 1.025 into my calculator, then click x^y, then type (12/4)= then I get 1.0769... or roughly 107.7%, or 7.7% more than I originally borrowed, and that's where I got the 7.7% in my original post.

    But now as I have said, I reckon there's an extra 0.4% APR hidden behind the fee!

    So, using a definition of APR that Martin has used elsewhere on this site, I reckon 6.5% to 8.1% is the actual APR of Egg's "0% anniversary offer".

    Shocking isn't it?
  • Joe_BloggsJoe_Bloggs Forumite
    4.5K Posts
    I congratulate you and thank you for your incisive post. I hope you will stay with the MSE community. From personal experience it takes a while to get up to speed with the pace of things. Often when you first join you are clueless, desperate and lost. You can't take in all of the information.You don't realise your own situation. Eventually you can pick up information and skills from those that have been there and done that. There is scope and opportunity to change things for the better.
    J_B.

    Edit.
    I don't think here is any point complaining to the FSA. The OFT may be worth a shot.
  • I think I agree with your sentiments about the FSA and OFT.

    When I complained to Egg they said the FSA asked them to apply Balance Transfer handling fees to discourage tarts. And yes, Egg said tarts!

    The OFT are probably still having a quiet lie down after their success with the £12 reduced penalty fees thing ... not sure they will be up for another spat quite so soon. The timing of the £20 reduced to £12 penalty fee thing, and then the almost cartel-like imposition of much heavier balance transfer fees is quite interesting. I think the industry just gave the OFT the finger there.
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