Scrap the farcical 'new official credit card APR examples'
It’s meaningless drivel, "If you spend £1,200 at an annual interest rate of 16.9% (variable) your Representative APR will be 16.9%" – no surprise Sherlock! Yet new rules mean you’ll now see it everywhere – we need to scrap or change this nonesense.
It’s all part of the OFT’s new Consumer Credit Directive that started 1 Feb. I’ve already vented my spleen on the fact that by enacting one EU law, LESS people now need get advertised loan rates (see Representative rate travesty blog).
Admittedly not all the rule changes were bad, but yet another had popped up. All credit card product (inc. cards, loans & overdrafts) adverts, marketing and communications are forced to give a specified explanation of what the APR means.
I’d hoped this would be useful, it sounded close to my call for ‘more explanation not just information’ at the Treasury Select Committee but it’s far from it.
Can you spot the pattern?
What I had hoped for was something like,
If you borrow £2,000 at 18.9% APR and make the minimum payments it’ll cost you £340 interest in the first year."
Yet the rules prescribe it should be done as follows – here are three real examples from different cards…
If you spend £1,200 at an annual interest rate of 7.9% (variable) your Representative APR will be 7.9% (variable)."
If you spend £1,200 at an annual interest rate of 16.7% (variable) your Representative APR will be 16.7% (variable)."
If you spend £1,200 at an annual interest rate of 19.9% (variable) your Representative APR will be 19.9% (variable)."
You can see our entire page of them here: Official APR examples.
Does this really tell anyone anything? Does it mean anything at all? It’s completely tautologous.
It only makes any difference when there’s an annual fee
The only time I can think that it makes things any clearer is when cards have annual fees, then you do see a slight change.
For example this one from the BA Premium Plus Amex (see Airline Credit Cards guide):
If you spend £1,200 at an annual interest rate of 19.9% (variable) with an annual fee of £150, your Representative APR will be 50.1% (variable)".
Why we should scrap it (or do it properly)
I’m actually tempted to say this isn’t just useless, it’s worse than useless and could actually be damaging, for the following reasons:
Most cards don’t have fees!
It’s a rule that only really helps when cards have fees, yet these days the enormous majority of credit cards are fee free. Yet they still have to find space for this huge amount of drivel.
People are already confused enough about debt without adding a phrase that’s such a tautology it makes you think "am I missing something here?".
On fee based cards – tell ’em about the fee!
Even with fee based cards I suspect most people understand,
You’re charged a £150 per year fee, plus 19.9% APR on whatever you borrow"
far more than,
If you borrowed £1,200 all in that’s a representative APR of 50.1%".
Couldn’t we have just regulated to ensure the fee was prominent enough? Even so, with fee based cards I wouldn’t mind the extra so much, if it wasn’t for the fact…
The rate given’s meaningless unless you’re borrowing £1,200
While for cards with fees, I accept giving the representative APR could make comparison easier, it’s worthless to anyone other than someone borrowing the prescribed £1,200 example, as it is ONLY correct at that level. Let me show you what I mean:
If you spend £1,200 at an annual interest rate of 19.9% (variable) with an annual fee of £150, your Representative APR will be 50.1% (variable)."
Now let me recalculate this for you with a back of the envelope calculation if other borrowing amounts were used…
If you spend £100 at an annual interest rate of 19.9% (variable) with an annual fee of £150, your Representative APR will be 322% (variable)."
If you spend £500 at an annual interest rate of 19.9% (variable) with an annual fee of £150, your Representative APR will be 82% (variable)."
If you spend £5,000 at an annual interest rate of 19.9% (variable) with an annual fee of £150, your Representative APR will be 28 % (variable)."
If you spend £10,000 at an annual interest rate of 19.9% (variable) with an annual fee of £150, your Representative APR will be 25% (variable)."
Now of course, I spend my life looking at these products, so my opinion may be biased – has this explanation actually helped anyone? Do let me know – and if not, would my cost based example be better?
