/ Money

How do credit companies get away with it?

A man trapped by credit

High-cost credit often grabs headlines, but many mainstream lenders also have products designed to cash-in on peoples’ mistakes and desperation. The new regulator must clamp down on irresponsible lending.

Our latest research found that many Brits are becoming increasingly reliant on credit to pay for everyday essentials such as rent, bills, and food.

It’s hard enough for many people to get hold of affordable credit, but it’s only made worse when their lenders end up charging far more than expected. Let’s look at a few examples from across the credit industry.

The creeping costs of credit

If you’re late making a payment for your credit card, your provider can charge you up to £12 to cover its additional administrative costs. ‘Fair enough’, you might say. And yet, the terms and conditions of some providers also allow for the withdrawal of a 0% balance transfer deal if you’re late making a repayment, or if you underpay one month – even by just £1.

In this case, you’re likely to have already paid a balance transfer fee of around 3%, and may now face paying the lender’s standard APR on the full transferred balance. This hardly feels like a proportionate response.

Meanwhile, payday lenders aren’t restricted in the same way as credit card providers regarding how much they can charge in late payment fees. Penalties are often higher than the true cost to the company, with late payment fees of £20 or more charged by many lenders.

Overdraft fees can also be disproportionate to the ‘misdemeanour’. Using an unauthorised overdraft for just two days a month could cost you more than £50 a month with a number of mainstream providers.

Even catalogue finance is getting in on the act. One firm offers a ‘buy now pay later’ option, under which no interest is charged if full repayment is made within 12 months. Sounds like a good deal. However, if the 12-month point is passed, interest is backdated to the date of purchase at a representative APR of 34.9%, even if you’ve only underpaid by a small amount. This seems unfair to me.

The tricks and traps are legal

Perhaps most surprisingly, all of the examples above are allowed under the current rules. With the Financial Conduct Authority (FCA) taking responsibility for regulating credit next year, we think this is a unique opportunity to clean up the credit market.

Not only does the FCA need to clamp down on unscrupulous lenders, it also needs to intervene proactively to ensure borrowers aren’t caught out by sneaky product design and excessive charges.

What are the sneakiest tricks you’ve spotted from a lender? Have you been caught out by disproportionate charges or unexpected terms and conditions?

William Plant says:
6 March 2013

The new fast loans adverised on TV have very high interest rates . To me this looks like legalised loan sharks

My son has amassed huge debts, which we are trying to pay off for him, despite being retired and on a small income. Many of these are from Payday loan companies, charging usurious interest rates, which raid his bank account regularly, often leaving him & his partner with only about £30 to cover rent/bills/food for the week. The Government has refused to consider a cap on interest rates (although almost every other European country has capped interest).

Stella Creasy (MP for Walthamstow) is campaigning to cap interest rates; contact her at stella@workingforwalthamstow.org.uk if you think that loan-sharking should be regulated.

Yesterday, the government announced plans to improve regulation of payday lenders – they’ve been given 12 weeks to clean up their act.

B Petterson says:
8 March 2013

I lost a 0% deal with MBNA when the DD did not clip in as expected, & this became a “late payment”.
Of course this was buried in the small print, yet as I’m not the kind of guy to miss payments, this was a severe learning-experience. I switched within the hour but at further cost.
More importantly ( to my tiny mind) how does WONGA get away with the TV ads featuring such a crude ageist set of dreadful puppets and senile voicing?

B Petterson – if the Direct Debit didn’t work as expected, this would seem to have been an MBNA slipup rather than yours, so did you ask them to reinstate the 0% deal?
You shouldn’t have been penalised if it was their fault.

steven says:
8 March 2013

ive never had a prolem with my credit card provers because i aways stay within my credit limt and set up a dirtect debit for the min payment so i never miss a payment

Andy says:
12 May 2013

To be frank, we are not interested.

If you’re borrowing with a 0% deal on your existing credit card account, you might want to bear in mind what happened to me with MBNA – may be true for all credit card providers for all I know. I borrowed £4k at 0% (£180 transfer fee) towards the end of the month. I paid off the full value of all that month’s purchases when the next statement came out, leaving the borrowed £4k as the only debt. Because I was wary of how the paying off rules would apply, I used the card for no fresh purchases and just one minor standing order for the next month. Yet on the next statement I was charged a chunk of interest. When I persisted in trying to find out why, it was ‘because I hadn’t paid off the balance in full’ – consequently I was apparently being charged interest on all the month’s transactions preceding the cash transfer from the dates of purchase. I can’t believe they can impose the interest charge retrospectively in this way but I guess it’s down to interpretation of the t&c. As far as I can see, the only way of borrowing money at the preferential zero % in that way would have been 1. to clear all retail purchase balance the month before, 2. to borrow in a month when no other purchases are made and 3. to continue not to make any purchases until the loan is finally repaid.