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  • FIRST POST
    • Former MSE Helen
    • By Former MSE Helen 8th Mar 11, 11:02 AM
    • 2,324Posts
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    Former MSE Helen
    "Scrap the farcical 'new official credit card APR examples'" blog discussion
    • #1
    • 8th Mar 11, 11:02 AM
    "Scrap the farcical 'new official credit card APR examples'" blog discussion 8th Mar 11 at 11:02 AM
    This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.





    Please click 'post reply' to discuss below.
Page 1
    • cse
    • By cse 8th Mar 11, 12:55 PM
    • 166 Posts
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    cse
    • #2
    • 8th Mar 11, 12:55 PM
    • #2
    • 8th Mar 11, 12:55 PM
    I think you're getting APR and interest rate confused. "If you borrow £2,000 at 18.9% APR and make the minimum payments itíll 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
    • By JimmyTheWig 8th Mar 11, 1:06 PM
    • 11,863 Posts
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    JimmyTheWig
    • #3
    • 8th Mar 11, 1:06 PM
    • #3
    • 8th Mar 11, 1:06 PM
    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
    • By cse 8th Mar 11, 1:21 PM
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    cse
    • #4
    • 8th Mar 11, 1:21 PM
    • #4
    • 8th Mar 11, 1:21 PM
    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
    • #5
    • 8th Mar 11, 1:22 PM
    Representative Rate
    • #5
    • 8th Mar 11, 1:22 PM
    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.
    • cse
    • By cse 8th Mar 11, 1:28 PM
    • 166 Posts
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    cse
    • #6
    • 8th Mar 11, 1:28 PM
    • #6
    • 8th Mar 11, 1:28 PM
    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.
    Originally posted by Frankl
    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
    • By MSE Martin 8th Mar 11, 1:30 PM
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    MSE Martin
    • #7
    • 8th Mar 11, 1:30 PM
    • #7
    • 8th Mar 11, 1:30 PM
    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
    Originally posted by cse
    Im not getting it confused - that was just an example for non fee cards (the majority) - interesting note about TCC though
    Martin Lewis, Money Saving Expert.
    Please note, answers don't constitute financial advice, it is based on generalised journalistic research. Always ensure any decision is made with regards to your own individual circumstance.

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  • jamesd
    • #8
    • 8th Mar 11, 2:31 PM
    • #8
    • 8th Mar 11, 2:31 PM
    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
    • By Gorgeous George 8th Mar 11, 6:28 PM
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    Gorgeous George
    • #9
    • 8th Mar 11, 6:28 PM
    • #9
    • 8th Mar 11, 6:28 PM
    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
    Last edited by Gorgeous George; 08-03-2011 at 6:31 PM.
    There are 10 types of people in this world. Those who understand binary and those that don't.
  • 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?
    • drt406
    • By drt406 9th Mar 11, 7:58 AM
    • 366 Posts
    • 296 Thanks
    drt406
    FEWER people, please, Martin, not LESS people.
    It must be true, I read it on Wikipedia
    • peterbaker
    • By peterbaker 9th Mar 11, 1:29 PM
    • 2,436 Posts
    • 1,088 Thanks
    peterbaker
    Interesting comment, drt406 ... it is all a question of education isn't it? ( http://www.usingenglish.com/weblog/archives/000060.html )

    Learning by example is probably the way most people prefer their eggs, so I side with Martin on this.

    I am totally against anything which adds nothing to understanding - like those tautologous (first time I've ever copy-typed that one ) examples Martin laid out.

    But I also have great sympathy with Georgeous George's 'Borrowing on credit cards for more than a few months is stupid.'

    Wordy examples which plainly expose the stupidity are perhaps the best way to get the message across.

    However, I am extremely uncomfortable with the huge swing that has occurred in the last couple of years from total public intolerance of any published deal of greater than say 30% APR to one where any figure can once again pass unnoticed. I think it began to go the other way when a government sponsored scheme for sub-prime lending was introduced and someone realised that it started at around 30%. Before September 2008 I think most credit cards were of the order of late teens APR's with a few exceptions, overdrafts were early teens, personal loans if advertised were well sub 10% and some were around 6% and most applicants got rates of the same order as those advertised.

    We are now in a credit market where customers who were in those deals have been tipped out on their heads and are being severely punished for using anything other than their existing mortgages to borrow. And we seem to be reeling as a public in the slipstream of a rapidly moving feast (for the banks) on all outstanding unsecured credit.

    What is required now in terms of properly communicated rates will indeed be a lot different to what sufficed in the past because people are getting hurt badly very quickly because of the disgracefully high rates.

    No matter what religious persuasion one might be, it is times like this when you can understand religious intolerance of interest above certain levels. Such high rates are clearly not in the public interest at all. It is no wonder that we are all scratching our heads about how they should be advertised ...

    I think the answer might be that the advertisment of any deal that leads to any customers being baited and switched to a rate greater than 20% when they apply should be banned.
  • jamesd
    Why do these rules apply to MSE?
    Originally posted by oakhouse13
    MSE receives payments for referrals to some providers, so it's treated as any other business that is acting as introducer.

    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."
    Originally posted by oakhouse13
    But the editorial content is done without considering that.

    Though what is featured and promoted may be influenced by the commercial considerations as well as the educational and other objectives that Martin has.

    It's similar to magazine advertising: subject of an issue may be decided by marketing as well as editorial considerations, the editorial content will/should be independent and the advertisers pay to be in the issue or adjacent to specific editorial.
    • Rafter
    • By Rafter 10th Mar 11, 12:05 PM
    • 3,837 Posts
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    Rafter
    Agree with you Martin - an APR - particularly when it goes above 100% is very hard for more than the 1% of people who are mathematicians or accountants to work out.

    A pound note 'cost of credit' is more suitable.

    What I would like to see though is an end to 0% balance transfer deals (with a 3% fee) for a short period, where they are obviously not 0% when there is a variable fee attached.

    The bigger issue for me is whether the new Financial Conduct Authority will impose greater restriction on credit cards and other short term lending such as pay day loans to restrict the total cost of credit and the amount that can be rolled over.

    For me, credit card limits should be no more than a couple of months salary and have a minimum repayment of 10%. If you need to borrow more or longer term you should take out a personal loan. Likewise payday loans should be limited to say a weeks income and the interest rate if you roll the loan over should be dramatically less.

    That way, the amount of 'problem' debt people can get into is drastically reduced, losses in the industry are reduced and hopefully everyone pays a fairer price.

    R.
    Last edited by Rafter; 10-03-2011 at 12:14 PM. Reason: meaning
    Smile , it makes people wonder what you have been up to.
    • Paulgonnabedebtfree
    • By Paulgonnabedebtfree 11th Mar 11, 4:11 AM
    • 2,703 Posts
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    Paulgonnabedebtfree
    While we are on the subject of making things clearer, the fact that I play scrabble a lot less than Martin is clearly showing up.
    I needed to look up "tautologous".
    • esuhl
    • By esuhl 11th Mar 11, 1:40 PM
    • 8,859 Posts
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    esuhl
    Pfft. I agree - it helps no one to pluck a figure like £1200 out of the air, then combine a fixed (annual charge) and variable rate (interest) into either a meaningless or tautological amount.

    It doesn't matter how good your mathematical ability is, it will always be easier to understand the cost if fixed and variable charges are presented separately (unless you want to spend exactly the example amount).

    Obfuscating fees in this way robs people of the right to make an informed decision. It goes against the underlying principles of democracy and a free-market economy as it unfairly disadvantages those with poor mathematical skills - the very people most likely to end up in debt with their lack of financial awareness exploited by multinational billionaires.

    Seriously, who at the OFT was receiving sexual favours in return for passing such regulations?

    If the credit industry wants to play games, why not install roulette wheels at the point of sale to determine the charges?
    • kevroberts66
    • By kevroberts66 13th Mar 11, 5:56 PM
    • 166 Posts
    • 3,587 Thanks
    kevroberts66
    I just dont understand why credit card companies are charging 19% etc when the bank of england lending rate is 0.5%, Surely the credit card companies ould come down to at least 10% and this may encourage people to spend more and help the economy.
  • jamesd
    Because they can and because economic troubles increase default risk.

    They are cutting rates but in a different way: with balance transfer or 0% for purchases deals to selected customers. I have offers of that sort from three different card companies to encourage me to use their card.

    If you want to cut costs one of the more useful things you can do is get an MBNA/Virgin card because those tend to have quite nice repeat balance transfer offers that an substantially cut borrowing costs. RBS/Natwest is also regularly doing that sort of thing for me and it seems that Santander may also - just offered me 3% fee and 0% balance transfer for a year. I have an excellent credit record and deals are specific to individuals so others may get deals on less good terms. Not taking the first offer you get can also help, it's common for cards to improve the offers if you don't bite the first time.
  • AnnGran
    Scrap the farce!
    I agree that the only way to make the interest rate clear is to state the actual cost of the debt. Banks just want to keep as many people in the dark as possible. The more of us they can suck in, the greater the bonuses they will get. Who trusts the bank managers these days?
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