A recent inquiry by a Treasury Select Committee highlighted the complexities of calculating annual percentage rates (APRs). The inquiry revealed that there are around a dozen different ways of calculation the APR. This means that cards with identical APRs might not actually cost the same.
A recent survey by ICM Research, on behalf of Egg, revealed that most consumers are unaware of the different methods for calculating the APR. The research, which questioned 1,000 UK adults between 14 and 15 January 2004, also gauged consumer opinion in terms of best practice and their views on the upcoming review of interest charging methods.
The research revealed a significant lack of awareness of different calculation methods. A staggering 81% are under the impression that if two different cards with identical APRs were used in exactly the same manner they would always be charged the same amount of interest.
Overwhelmingly, UK consumers see the interest rate as the most important factor when deciding which is the best card for them with some 62% claiming this as the key consideration. Not surprisingly only one in ten (10%) would view the way in which interest is legislate to make all providers use the same method of interest calculation.
Given the high level of consumer confusion regarding the calculation of interest charges, Egg also commissioned independent research company Dynamic Markets to conduct a mystery shopping exercise in which 50 researchers – posing as potential credit card customers – approached a total of five major credit card providers via their websites and call centres.The mystery shopping research found that almost half (48%) felt that the information provided by the five card companies on interest calculation methods was difficult to understand.
"You would not expect two petrol stations, advertising petrol at an identical price per litre, to charge significantly different amounts for filling up the same car," says Mark Nancarrow, Egg's chief operating officer. "Equally, when choosing a credit card, you might be forgiven for believing that two cards with identical APRs would charge the same interest ... if the cards were used in exactly the same manner. Unfortunately, this is far from being the case."
Egg's findings lead them to the conclusion that the only way to provide true clarity for consumers is for the DTI to standardise the way in which interest is calculated and applied on all credit cards.
Consumers may be spoilt for choice, with some 1,300 cards available, but we still don't have enough information to make an educated decision as to what is the best deal.
The importance of getting the best deal shouldn't be underestimated, either: if everyone switched to a cheaper card, the Depatment of Trade and Industry estimates that it could result in a saving of £400 per household.