A Voluntary Initiative on Credit Cards


A Voluntary Initiative on Credit Cards

Contact - Lindsay Lee, Associate

At the end of June the Office of Fair Trading (OFT) published its response to Which?'s super-complaint on credit card interest rate calculation methods. In its response the OFT concluded that the best way to increase transparency surrounding the cost of credit arising from the use of credit cards was to start a voluntary initiative involving the banking industry and consumer bodies.

As credit card issuers will be aware, earlier this year Which? submitted a super-complaint to the OFT setting out six key features (other than the APR) which impact on the amount customers pay for credit on purchases. Which? maintained that standardisation of these features would lead to enhanced competition on APR.

The six key features were:-

- interest free periods - whether or not such periods were offered and whether they were only available if the previous month's balance had been cleared.

- end of interest charge - whether interest is charged up to the date when the balance is repaid in full or until the statement date before the full balance repayment.

- interest calculation - whether interest is calculated by multiplying the average daily balance in the month by the monthly rate or by applying the daily rate to the sum of the daily balances.

- start of interest charge - whether interest accrues from the date of purchase or the date it is debited to the credit card account.

- statement day - whether interest is charged until the day before statement date or the statement date itself.

- interest on interest - whether the interest bearing balance in one month's statement includes interest charged on the previous month's statement.

Which? maintained that credit card issuers' methods of interest calculation were rarely made clear either in the summary boxes or the terms and conditions and that the variation in interest calculation methods meant that APRs were not a valid comparator between credit cards.

The OFT, however, concluded that consumers generally do not choose credit cards on the basis of all the features which affect the cost of credit, and that in fact many consumers do not choose cards on the basis of the APR or any other comparison at all. Consequently, the standardisation of Which?'s six key features would only resolve the problem in part and would lead to restricted product choice for those consumers who do shop around. The OFT took the view that the difficulties faced by consumers in choosing the credit cards most suitable to them raised issues wider than just interest on purchases and Which?'s six key features. Accordingly, the OFT concluded that any solution must involve all aspects of the total charge for credit and not just some elements.

The OFT's proposed initiative is likely to encourage credit card issuers to take voluntary action to make the cost of credit for cards products more transparent and comparable and to publish information to help consumers to choose the right card product for them.

The results of the OFT's negotiated approach with industry will be publicised in six months. While these results might include a recommendation for new or revised legislation, any such recommendation will probably have to be within the context of existing legislation (including current consumer credit regulations on advertising, agreements and pre-contract disclosure) and forthcoming legislation including primarily the transposition of the Consumer Credit Directive into UK law.