Product category:
General insurance
News Release from: uSwitch | Subject: Credit cards
Edited by the Insidemoneytalk Editorial
Team on 20 March 2007
uSwitch.com exposes the credit card cash
rates scandal
The Facts:
6.61 million people withdraw on average £809 in cash on their credit cards every year In May 2005 the average APR for cash withdrawals was 20.83%APR - today it stands at the equivalent of 27.06% APR3
This article was originally published on Insidemoneytalk on 9 Apr 2007 at 8.00am (UK)
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Rocketing rates on cash withdrawals add at least £41 million4in interest charges to cardholder credit card bills - although this figure could be as much as £334 million.
The Background: On 31st May 2005 the Department of Trade and Industry (DTI), in conjunction with the OFT, introduced reforms to the Consumer Credit Act 1974 with the aim of simplifying the way in which credit card rates were displayed to enable consumers to make meaningful comparisons.
One of the key changes was to restrict the use of APRs in advertising and customer literature to the main purchase rate on credit cards.
Further reading
One year on from OFT's intervention and one in five credit card customers are still not happy
uSwitch.com reveals that nearly seven million credit card customers (21%) are not happy with their existing provider
The OFT's announcement to improve consumer information on credit cards over the next six months
Mike Naylor, Personal Finance Expert at independent online price comparison and switching service uSwitch.com comments:
British holidaymakers to pay £759 million for using credit cards overseas warns uSwitch.com
Latest money making moves:
All other rates, including cash advance rates, were to be displayed as 'per annum' rates, which do not take account of any associated charges and fees or compound interest, and therefore appear to be lower than their APR equivalent.
It is unlikely that the DTI and the OFT could have imagined that the changes they introduced would result in consumers paying at least an extra £41 million in interest charges without even realising it.
USwitch.com now asks whether the huge increase to cash rates implemented by lenders over this period are merely a matter of coincidence ...
uSwitch.com Findings: 62% of credit card users don't understand the difference between the way interest rates are displayed now (per annum rates), and the way they were previously displayed (APRs) Since the introduction of Chip and Pin 730,000 people (11%)6 withdraw cash on credit cards on a more regular basis In less than 2 years cash rates have increased by 30% (6% APR), from an average rate in May 2005 of 20.8% APR to the equivalent today of 27.06% APR - while only appearing to have increased to 23.79% (the per annum rate) in the eyes of consumers.
In the same timeframe purchase APR's on credit cards (the headline rates) have increased from 15.4% to 16.3%, a rise of 0.9% or a relative increase of just 5.84% 72% do not understand what charges they will incur from ATM withdrawals on credit cards in the UK - this increases to 80% for overseas cash transactions.
Almost one million people believe the charges on credit card cash withdrawals are the same as those on a debit card and cost them nothing On 31st May 2005, the Department of Trade and Industry's (DTI) reforms to the Consumer Credit Act 1974 came into force.
The DTI had set out to simplify the credit card industry and make it easier for consumers to benchmark products and select the most appropriate credit card for their individual financial needs.
Today, new research from uSwitch.com, the independent price comparison and switching service, reveals that as a result of the changes introduced, amongst other factors, consumers could be paying up to £1.45 billion in interest on cash withdrawals every year, compared to £1.12 billion 22 months ago, while remaining none the wiser.
The increase in interest charges since the changes came into effect follows the decision by major credit card issuers to increase cash rates for their customers by an average of 30%10, adding up to £334 million in interest alone to credit card bills for 6.6 million consumers.
However, the vast majority have only noticed their interest rates increasing by an average of 2.96% - and not the 6% that they have increased by in real terms.
These findings raise the possibility that credit card providers have used the CCA reforms to impose considerable cash rate hikes on their customers by stealth.
There were 47 million cash withdrawal transactions on credit cards in the last year, amounting to £5.37 billion.
The average annual cash withdrawal of £809 now costs consumers at least £29.18 in interest (compared to £22.97 prior to the changes coming into effect) rising to as much as £190.67 (compared to £146.87).
When cash rates were displayed as APRs they reflected the total charge for credit over 12 months, and took into account the effect of monthly compounding interest and all applicable charges and fees, such as the cash advance fees.
The annual rate that the banks now display does not take into account compounding interest, fees or charges, and therefore appears to be lower than an APR.
Since the changes to the way cash rates are displayed, customers will have seen their cash rates increase by as much as 9.73% when the additional costs of borrowing are taken into account, or by an average of 0.28% every month.
Nick White, Director of Financial Services at independent price comparison and switching website uSwitch.com, said: "Consumers could be forgiven for thinking that they are being treated as the banking industry's personal ATM.
It's easy to see why the major banks continue to announce record profits, which this year alone totalled in excess of £40 billion, when the welfare of their customers continues to take a backseat to shareholder profits".
""With some providers now charging up to the APR equivalent of 31.23% on cash withdrawals, which is higher than the average sub-prime credit card of 30.9%APR17, cash rates have become sub-prime rates masquerading as mainstream lending.
We now challenge the OFT to investigate whether these rates amount to 'usury' or extortionate lending.
"People who use a credit card to withdraw cash may already be struggling under the burden of debt, and are having to resort to this method of borrowing to make ends meet".
"They can ill afford to pay the exorbitant rates of interest that most lenders are now charging them".
"While we accept that credit card providers have to make money, and that cash withdrawals carry a higher risk of people getting into bad debt, it is indefensible for companies to penalise their most vulnerable customers." The uSwitch.com research has found that 62% of all credit cardholders think that an annual rate of 20.89% is lower than an APR of 21.4%, when the opposite is true.
(An annual rate of 20.89% is equivalent to an APR of 26.17% - see table one).
A cash advance rate is incurred for using a credit card in an ATM and a per annum interest rate is applied (which is higher than the purchase APR) from the day the cash is withdrawn.
In addition, unlike standard purchases on credit cards, cash withdrawals are not eligible for an interest free period, so customers pay interest on the amount withdrawn from the day of the transaction.
Just one in four people that use this facility at home clearly understand how much it costs, and this figure falls to one in five for overseas cash transactions.
White continues: "While the DTI may have intended to simplify things for consumers when they came up with these changes, they have actually caused more confusion".
"The reality is that most people who use this facility are either unaware of the actual costs incurred, or are so desperate to get their hands on the cash that they don't care how much it will cost them".
""Rates and charges on credit cards have proven in the past to be confusing even for a Cambridge academic, so the average consumer stands no chance.
While we welcome any efforts to improve transparency, unfortunately the changes to the CCA have made things worse.
The subsequent move by credit card providers to increase cash rates and charges could be seen as an exploitation of the average consumer's lack of understanding of how their charges are calculated.
The manner in which these increases have been introduced is anything but transparent." As a result of the changes to the way in which cash rates must now be displayed, in some cases they appear to have gone down since May 2005, when in real terms they have increased".
"For example, the Halifax One Visa card displayed a cash withdrawal rate of 25.4% APR in May 2005, whereas in March 2007 this rate is being displayed as 22.95% per annum - an apparent decrease of 2.45%".
"In fact, the rate is the equivalent of an APR of 26.09%".
"Similarly, Lloyds TSB's cash rate was 19.9% APR in May 2005, whereas now it is 19.51% per annum (equivalent to 22.57% APR).18 This is a prime example of the misleading nature of the rates that must now be shown".
"*Table One - Cash rate increases introduced by major providers since May 2005: Source: uSwitch.com data correct as of 16th March 2007 Key research findings What do people think it costs to withdraw cash using a credit card overseas? One in five people think they ONLY incur a single cash withdrawal fee when they use an ATM to withdraw cash overseas - in fact they incur a cash handling fee, a foreign exchange fee and a higher interest rate with no interest free period 18% think they are charged the purchase APR on the amount they withdraw 27% of people do not know how much it costs to withdraw cash overseas 3% think the cost is the same as if they had used their debit card How often do credit card holders use this facility and how much do they withdraw? On average, consumers make 8.5 cash withdrawals in the UK and overseas every year - a total of ?809.14 per person2 The average cash withdrawal in the UK is ?84, and the average number of withdrawals is 6.2 - a total of ?520.48 per person2 The average cash withdrawal overseas is £123.36, and the average number of withdrawals is 2.34 - a total of ?288.662 Over 1 million people make cash withdrawals with their credit card more than once a month7 How much have cash rates increased by since May 2005? On average these rates have increased by 6.23% APR - a 30% increase15 The worst culprit for increasing cash rates over the past 22 months is Barclaycard on the Platinum Mastercard with an increase of 9.73% APR - this equates to 0.44% per month19 White concludes: "Although the DTI set out to give consumers a clearer understanding of credit card rates this clearly hasn't happened.
What it has actually served to do is allow providers to implement increases of up to 49% under the disguise of a lower per annum rate.
Overall, credit card providers are becoming increasingly predictable in their response to government initiatives to help consumers get a better deal.
Following the OFT's decision to reduce penalty fees to ?12 earlier this year, credit card providers implemented a series of increases across all fees and charges in order to recover any lost revenue and it seems this trend is set to continue".
""We strongly advise people to use the facility to withdraw cash on their credit cards as a last resort".
"This is an increasingly expensive practice and it seems that the number of people using it is on the increase following the introduction of chip and pin." uSwitch.com calls for: Amendments to the Consumer Credit Act to ensure that rates are displayed in a uniform and comprehensible way, representing the true cost of borrowing for non-purchase rates.
A standardised summary box which makes it compulsory for the effective rate at the very least to be shown beyond the point of acquisition.
A calculator to allow credit card customers to work out the true cost of borrowing when using a card to make cash withdrawals.
An investigation into cash rates by the OFT and the introduction of a cap so that the rates charged are a fair reflection of the risk to lenders.
For more information visit www.uswitch.com or call 0800 093 06 07.
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