Richard Lloyd: How credit card industry makes £334m

Picture: John Devlin
Picture: John Devlin
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Levying of hidden fees must stop, writes Richard Lloyd

There are currently around five million credit cards in Scotland and people are increasingly using them for day-to-day spending. The average cost of purchases is falling meaning that people are now using them more for everyday shopping, rather than just big ticket items.

As the use of credit cards soars, we think it’s vital people can pick the right card for their needs so they don’t end up paying over the odds.

The regulator – the Financial Conduct Authority (FCA) – is already ­taking a look at the credit card market to ensure that consumers are able to get a good deal.

However, recent Which? research for our Stop Sneaky Fees and Charges campaign has identified a problem with so-called “0 per cent balance transfer” deals that we think the FCA should take action on. One in five who took out a new credit card in the last two years did so to make a balance transfer, but we’ve found consumers may not always be making the right choice because they are often misled over the true cost of these deals.

The problem is that 0 per cent balance transfer deals are rarely free of charges. When we carried out our research there were 154 cards on the market offering some kind of balance transfer deal, and 94 per cent of them came with a fee.

We think that the way these deals are advertised is confusing and could mislead people into thinking there is no charge. In our test only 4 per cent could figure out how much a balance transfer would cost. Most people thought it would be free, even though we showed them there was a fee to be paid.

Lots of people use these cards to manage their existing debts, instead of making purchases, but we found only a third are able to pick the cheapest card for this purpose. Which shows there is clearly a problem with the way this information is communicated.

This is just one part of a wider problem with fees and charges that we have found across financial services, from mortgages to overdrafts. It’s why we launched our campaign to Stop Sneaky Fees and Charges.

We estimate that the credit card industry makes around £334 million in fees from balance transfer transactions every year, so it’s worrying that so many people find it difficult to work out the cost of these deals as it could mean they end up paying more than expected.

We think that too many credit card deals appear to include sneaky fees designed to catch customers out. Two-thirds of people in the UK have a credit card and the FCA needs to ensure consumers are well protected.

Which? has submitted its evidence to the regulator and we want it to take action to ensure consumers understand these fees. We think the regulator should look at whether the fee should be shown as a monetary sum rather than a percentage, or even consider banning firms from advertising deals as “0 per cent” when there is a fee.

Credit cards, including zero per cent deals, can be a useful way to help people manage their finances, but to ensure people don’t end up paying over the odds, they need to be able to compare between them and pick the correct one for their needs. If you’re considering taking out a credit card, think carefully about what you need it for. For example, consider whether you just want to use your card to repay existing debt, or if you want to use it for purchases.

You should also check what interest you’re currently paying on any existing cards.

Moving existing debt to a zero per cent balance transfer card can help you reduce the cost of borrowing, but check the fee and make sure you pay off the balance before the deal ends.

Finally, consider whether you can pay off your credit card bill in full every month. If you can’t afford to pay it off immediately, a zero percent purchases credit card could allow you to pay off your bill over a certain period without being charged interest.

However, if you don’t need a card for borrowing, look for one that rewards you for spending.

Richard Lloyd is executive director of Which?