The Salary Calculator

Recent reports reveal that nearly 90% of people in the UK have noticed a hike in their living costs, with fuel, food and borrowing costs rising. According to the Office for National Statistics (ONS), a quarter of the people surveyed are struggling to make ends meet and pay their bills. Subsequently, around 17% have been forced to take out loans and increase credit card borrowing.

Helen Morrissey, an analyst at the stockbroker Hargreaves Lansdown, said that now, many poorer households were likely “burning through their lockdown savings in a bid to meet their day-to-day living costs while others opt to borrow more to meet their needs.”

With living costs rising so much and many turning to credit cards, it has been argued that tighter rules around credit cards are required to protect credit card users. At The Salary Calculator, we’ll explain:

• What the current rules are
• Why people are calling for reform around credit card rules
• What changes are on the horizon

What are the current rules?

Under the current rules, following EU harmonisation in 2011, the UK uses representative rates of APR, where only 51% of applicants accepted by a credit card provider get the headline rate. Prior to this, 66% of borrowers were given the advertised rate of interest, or “typical” APR.” This change means that 49% of those who borrow may end up being faced with a higher rate.

A new report from consumer advice site MoneySavingExpert (MSE) report found that this can be incredibly harmful to borrowers and pointed out a number of other issues with the current system. Firstly, there is no cap on what a borrower can be charged, with those who fail to receive the advertised rate being presented with any rate. Likewise, MSE revealed that 40% of personal loan applicants and 28% of credit card applicants were offered a higher rate than advertised at least once across the last three years. This, unsurprisingly, was also found to have a “negative impact” on borrowers both financially and emotionally.

The report also highlighted that unless an applicant is approved using a credit card eligibility checker, the only way to find out what rate you’ll get is through an application. This not only means that they may opt for a deal because of a low advertised representative APR and then be left with a much higher rate of interest, but also, due to applications marking your credit file, people will most likely stick with their original choice even if the APR is higher.

Call for credit card reforms as cost of living crisis worsens

The current, ongoing cost of living crisis is detrimentally impacting millions. According to Anna Anthony, UK Financial Services Managing Partner at EY, despite many “already feeling the cost of living squeeze,” it’s only going to get worse with inflation on track to reach a 40-year high. In response to the current climate, with so many already exposed to financial risk, Martin Lewis, founder of MoneySavingExpert, has launched a campaign to put an end to the current credit card rules and has urged the financial regulator to put more safeguarding measures in place for borrowers.

In a statement discussing the issue, Lewis said: “The fact so many people can be charged more than the rate advertised is demoralising and often financially dangerous. Many only find out once they’ve applied, leaving a negative mark against their file, forcing many to accept the higher rate, or making it harder to find a cheaper deal elsewhere.”

Lewis went on to say that the UK should now take advantage of the opportunity Brexit has afforded the country in this area: “For years we’ve railed against this, and now we’ve a golden opportunity for change. We are told there will be a Brexit dividend – well, this change was caused by EU harmonisation, so I’m asking the Government to deliver on this one. Lenders tend to make most of their profits ‘from the tail’ – those people who get charged higher rates – and often they’re the ones with weaker finances. They need protecting.”

Not only did MSE highlight the current issues with the system, but it also made a number of recommendations to improve the situation for borrowers. One of these recommendations is to turn to the old system of typical APRs, where 66% of applicants would be offered the advertised rate, and to implement a cap with regards to the typical and maximum APR.

For greater transparency, MSE has also recommended that firms disclose the “the average proportion of successful applicants who don’t get the advertised APR, and by how much.” Moreover, to help prevent applicants from their credit files being detrimentally affected by checks, MSE recommends ‘soft’ credit searches for credit card and personal loan applications, or, it says, at the very least, prior to application firms should “should communicate prominently the rate range for those not accepted at the advertised rate.”

Change on the horizon?

Chancellor of the Exchequer, Rishi Sunak, is reportedly supporting the reform call by MSE. He commented: “Leaving the EU means we are now able to set our own path on financial services regulation – to ensure our rules act in the interests of UK consumers and respond quickly to our flexible and dynamic markets.

He went on to note the importance of the advertised APRs reflecting the rate the consumer is likely to receive and said that he would request that the FCA “assess the merits of reform in this area”.

The FCA responded: “We are continuing our work to ensure that the credit market works well for borrowers and provides the necessary protections, particularly in light of the cost of living crisis. We welcome MSE’s report and will discuss the findings and recommendations with them and the Treasury.”