MARTIN Lewis has called for an overhaul of the way interest rates on loans and credit cards are advertised to prevent consumers from paying more than expected.
The founder of MoneySavingExpert said the rules around so-called “representative” APRs should be reconsidered because they can trick people into paying more interest than they realize.
With a cost of living crisis currently crippling the finances of millions of families, Martin Lewis said the issue needed to be addressed urgently as unsecured borrowing neared record levels
He said: “Lenders tend to get most of their profits from ‘the tails’ – those people who are charged higher rates – and they are often the ones with the weakest finances. They need protection.”
The problem is how credit companies are able to describe the interest rates on their products.
Currently, companies can advertise a “representative” annual percentage rate (APR), meaning they only need to offer that advertised rate to 51% of applicants.
This means that 49% of applicants do not get the advertised rate and could end up paying more than expected for the loan.
Prior to 2011, companies offered “typical” APRs and had to offer the advertised rate to at least 66% of applicants.
The reduction to 51% was made to bring the UK in line with the rest of the EU.
But Martin said these rules are worse for consumers and the old standards should be reintroduced after Brexit.
A major problem for anyone applying for credit, such as a personal loan or a credit card, is that you don’t know what rate the lender will offer you until you apply.
Above all, there is no cap on the rate that can be offered by a lender, regardless of the advertised rate.
But any credit application will show up on your file – so if you’re offered a worse-than-expected rate and you don’t follow through, it will still show up on your score and could impact your ability to get credit elsewhere.
This is because lenders don’t like to see too many credit applications in a short time when they review your file.
Martin said that as a result, people either have to take what is offered even if the APR is higher than expected, or turn it around and accept having their credit report flagged.
MoneySavingExpert warned that consumers could easily find themselves in debt because of this.
“It was like a way to cheer you up”
Paul Kendall, 57, from Hertfordshire, told how he applied for a personal loan in 2017 advertised at 2.9% APR.
Although his loan application was accepted, he was offered an APR of 5.2%.
He said: “I asked him about the bank and they told me that the rate I had asked for was not for everyone, which I did not know before I made my request. .
“I felt like the lower rate was a way to lure you in – and because a credit check had been done, I felt I had to take the higher rate, as I didn’t want to not that it affects my credit rating.”
Another MSE reader said he was offered an interest rate almost three times the advertised rate.
Matthew Davey, 30, from Southampton, applied for a loan in 2021 at an APR of 2.9% – and was offered one at 8.5%.
He said: “It made me feel a little lame – especially since my credit score was 999.
“I declined the offer and looked around, but was afraid I wouldn’t be able to get credit anywhere else.”
MoneySavingExpert found that 40% of people who applied for a loan and 28% of those who applied for a credit card in the past three years were offered a higher APR than advertised at least once.
Martin said: “The fact that so many people can be charged more than the advertised rate is demoralizing and often financially dangerous.
“Many only find out once they’ve applied, leaving a negative mark on their application – forcing many of them to accept the higher rate, or making it more difficult to find a cheaper offer elsewhere. “
Martin called for “representative” APRs to be replaced with “typical” APRs again, meaning that at least 66% of applicants would get the advertised rate – and potentially more.
He said the difference between the typical APR and the maximum APR offered should be capped.
The money guru said companies should be required to disclose the proportion of successful applicants who do not receive the advertised APR.
Responding to the report, Chancellor Rishi Sunak said: “It is important that advertised APRs reflect the rate the consumer is likely to receive.
“I welcome the MoneySavingExpert report which examines ways to improve this and will ask the FCA to assess the merits of reform in this area.”
A spokesperson for the Financial Conduct Authority, which is the industry watchdog, said: “We continue to work to ensure the credit market works well for borrowers and provides the necessary protections, particularly in light of the cost of living crisis.
“We welcome the MSE report and will discuss the findings and recommendations with them and the Treasury.”
How to improve your credit score
Currently, the better your credit rating, the better your chances of getting the advertised interest rate on any product.
Everyone has a credit score which is used by lenders or credit card providers when asking to borrow money.
James Jones, Head of Consumer Affairs at Experian, said: Increasing your score by just one score range, for example from fair to good, can give you access to a much wider selection of products from credit and, above all, at lower rates.”
There are three main credit reference agencies (CRA) in the UK: Experian, Equifax and TransUnion.
Everyone has their own unique credit rating scale and can rate different factors differently, so your score won’t be the same for everyone.
Experian, for example, rates users on a scale of zero to 999, and a good score ranges from 881 to 960.
Simple steps can help improve your credit score, like making sure you’re on the voters list and not changing your address too often.
Any late payments will show up on your credit report, so try to pay your bills on time.
Jones said, “A single recent missed payment can lower your Experian score by 130 points. I recommend setting up direct debits for all your regular payments to avoid future hiccups.”
Cancel any unused cards and close any accounts you no longer use.
Monitor your score and if you think there is an error, correct it.
Plus, here’s how using a credit card could help your finances.
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