Credit card interest rate calculation methods

Name of complainant: Which?

Date of complaint: 1 April 2007

Subject of complaint

Which? believes that there are six key features (other than the Annual Percentage Rate (APR)) which influence what card holders pay for credit on purchases, and that standardisation of these features would lead to enhanced competition on APRs. The six features are:

• Interest free periods, that is whether an interest-free period is offered or not, and if so, whether it is conditional on the balance from the previous month being paid off in full.
  
  
• End of interest charge, that is whether interest is charged until the date of repayment in full or until the statement date before the cardholder repays the balance in full.
  
  
• Interest calculation, that is whether interest is calculated by multiplying the average daily balance in the month by the monthly rate or as a sum of the daily balances in the month multiplied by the daily rate.
  
  
• Start of interest charge, that is whether interest starts being charged from the date a purchase is made or the date it is posted to the account.
  
  
• Statement day, that is whether interest is charged until the day before a statement is produced, or until the day on which the statement is produced.
  
  
• Interest on interest, that is whether the interest bearing balance in the current statement period includes interest charged on the previous month's statement.

Which? claims that summary boxes and terms and conditions on their own hardly ever provide sufficient information on issuers' interest calculation methods, and that variation in these methods means that APRs are not comparable between cards. Which? concluded that the existence of the six identified features prevented consumers from making an informed choice on the basis of price, and caused a consumer detriment of £0.4bn a year.

OFT response: 26 June 2007

The OFT carried out its own analysis of the issues raised by Which? and concluded that standardisation of the interest calculation methods used by credit card issuers to calculate interest would not address the fundamental problems
faced by consumers, and could prevent card issuers from offering products which met different consumer needs, as well as reducing product innovation. The OFT concluded that the problem was much wider than that identified by Which? and, rather than focusing on standardisation of interest repayment calculation methods, a greater impact could be achieved by helping consumers to choose the best card for their needs.

The OFT therefore decided to initiate a negotiated approach to finding a way for consumers to make well informed decisions about the best card products for their needs, without restricting the commercial freedom of card issuers.

The OFT intended to work with the credit card industry, with consumer groups such as Which? and with regulators and government bodies, and would report on the agreed recommendations, conclusions, and any agreed actions within six months.

Action following response

Following the super-complaint from Which? the OFT carried out a research project into credit card comparisons. The OFT research shows that 70 percent of credit card holders did not shop around before selecting their current card, and that this meant they could be placing themselves at a financial disadvantage.

Research into the report involved looking at issues surrounding the comparative costs of using different credit cards for purchases, cash advances, introductory offers and payment allocation. The research followed work with the credit card industry, consumer groups, other regulators, government bodies and other key stakeholders.

The main recommendations are:

• the introduction of an independent credit card price comparison website run by the Financial Services Authority (FSA)
• improvement to how information is presented in credit card issuers' summary boxes
• standardisation of terminology used by credit card issuers in their product literature, and
• improvements to consumer education about the benefits of shopping around for a credit card.

The OFT will work with the card industry to implement the improvements to summary boxes, standardisation of terminology and education campaign.

Key documents

• Which? press release Which? launches interest charges super complaint 1 April 2007
• OFT press release OFT to work with the credit card industry to improve consumer information 26 June 2007
• OFT's Response to the super-complaint on credit card interest rate calculation methods by Which? (pdf 165 kb) 26 June 2007
• OFT's Credit card comparisons report (pdf 214 kb) February 2008
• OFT press release OFT publishes credit card comparisons report 11 February 2008
• OFT and FSA Action Plan Delivering better regulatory outcomes - May 2008 update: A joint FSA and OFT Action Plan Delivering better regulatory outcomes May 2008

Back to: Super-complaints