Martin Lewis urges reform of UK’s ‘dangerous’ credit card rules

Martin Lewis, founder of the MoneySavingExpert consumer advice site, has launched a campaign to end the “lucky dip” of advertised rates on credit cards and loans, urging the UK financial regulator to better protect consumers as borrowing hits record levels.

The campaign, which has already won the backing of chancellor Rishi Sunak, comes at a time when millions of families are becoming more reliant on credit cards to make ends meet, yet find they are unable to access low interest deals advertised by lenders.

Under current rules, only 51 per cent of applicants who are accepted by a credit provider have to be offered the “representative rate” of interest, meaning 49 per cent of borrowers could end up being charged a much higher rate.

As the true rate is not revealed until the application and credit scoring process is completed, many borrowers may feel forced to accept the more expensive offer, or be left with unnecessary marks on their credit file if they reject it.

Research carried out by MSE found that over the past three years, 40 per cent of personal loan applicants and 28 per cent of credit card applicants had been offered a higher APR (annual percentage rate) than the one advertised.

“For years, credit card applications have been inherently anti-competitive,” said Lewis. “When people apply for debt, they usually apply based on the advertised rate. The fact that a huge number of people can be accepted but charged more is demoralizing and dangerous — and staggeringly, there is no cap on what they can be charged.”

Martin Lewis: ‘With a new Brexit opportunities minister in place, this seems the right time to push for change’ © Kirsty O’Connor/PA

MSE’s research found that some borrowers ended up being offered more than double the rate advertised. One man with a near-perfect credit score applied for a £15,000 personal loan with an APR of 3.3 per cent, but was given a rate of 7.8 per cent, pushing up the cost of his monthly repayments.

“I had no option but to go with the APR offered as the mark was already on my credit file as a hard search,” he said. “It’s a lucky dip when applying and can actually put you in a worse financial situation.”

The UK started using representative rates of APR in April 2011 in order to homogenise rules across the EU, following an EU Directive. Before this, 66 per cent of borrowers had to be given the advertised rate of interest, known as the “typical” APR.

Lewis has challenged the financial regulator to take advantage of Britain’s exit from the EU to return to the former system where two-thirds of borrowers had to receive the rate advertised, as well as capping the maximum amount of interest that can be charged.

He also wants the new rules to be applied to 0 per cent credit cards, where borrowers are granted interest-free payments or purchases for a number of months. Currently, applicants can be offered a reduced number of months, but Lewis wants two-thirds to receive the time period advertised.

“Lenders tend to make most of the profit from the tail, those that get charged a higher rate — often those with weaker finances,” he said. “With a new Brexit opportunities minister in place, this seems the right time to push for change.”

The MSE report has been submitted to the Treasury and the Financial Conduct Authority.

“It is important that the advertised APRs reflect the rate the consumer is likely to receive,” said Sunak, adding that he “welcomed the report” and would ask the FCA “to assess the merits of reform in this area”.

The FCA said: “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.”

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