Newsroom

Consumer confusion over credit card costs

OFT publishes new research

45/04    16 March 2004

Consumers find financial information relating to credit cards difficult to understand, new research by the OFT has shown.  Over three-quarters of credit cardholders do not know what Annual Percentage Rate (APR) applies to their card, despite being aware that this is the key piece of comparative cost information. Consumers welcome proposals to introduce a simple summary box containing essential credit cost data.

Download Credit card survey (pdf file 322 kb) and annexes (604 kb)

The research involved interviews with a representative sample of 1,890 consumers. Based on the responses, the survey found that over 70 per cent of people surveyed have at least one credit card, with 37 per cent of cardholders having two or more credit cards. While 60 per cent of cardholders felt they had a good or fair understanding of credit cards, they couldn't generally answer specific questions or extract key information - e.g. about the APR and fees for late payment or cash withdrawal.

The OFT commissioned the research to establish consumers' understanding of the key financial terms and conditions of credit card agreements; to explore how consumers make choices about cards; and to investigate how understanding and choice might be improved through the clearer provision and presentation of information.

The research findings, which are being published, have informed the OFT's response to Government proposals for reform of consumer credit legislation, especially on how to improve information to borrowers and transparency in the credit market.

Other key findings include:

• 21 per cent  of those surveyed who did not pay off the balance in full each month have credit card balances of £1,000 or more consumers find it difficult to compare products in terms of cost; brand loyalty is an important factor, with many consumers simply taking cards from their own bank
• key financial information must be displayed prominently and separately from the general terms and conditions of agreement if consumers are to use it effectively
• consumers like the concept of a simple summary box, containing the APR charged, details of any additional charges, the interest rate, the minimum payment to be made, the interest free period, the period over which interest is charged and the credit limit.

John Vickers, OFT Chairman, said:

'Consumers need key information presented in a way that is easy to understand to make good choices about credit cards. Our research provides consumer evidence on how to do this.'

NOTES

1. The survey involved a cross-representative sample of 1,890 consumers, all of whom were interviewed face to face, and a series of focus groups drawn from the 1,890 at which in-depth discussions were held.

2. Proposals for reform of the Consumer Credit Act 1974 (CCA) and associated secondary legislation were set out by the Government in the White Paper 'Fair, Clear and Competitive: the Consumer Credit Market in the 21st Century', and the consultation paper 'Establishing a Transparent Market', both published in December 2003. The OFT responded to the Government's proposals for reform on 15 March and will be publishing its response in due course.

3. The Association for Payment Clearing Services (APACS) is currently piloting a summary information box to help cardholders understand key features of their cards. The OFT will share its findings about consumer preferences on the content of the summary box with APACS.

4. The OFT launched a study into the market for store cards in September 2003 (see press release 120/03).  It will publish its report of that study shortly.

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