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New research finds the majority of Brits are baffled by the most basic terms of their credit agreements, like how much interest they’ll be charged.
To protect consumers from being hoodwinked by credit providers, the Consumer Credit Act prescribes the information a company must give consumers before they sign a credit agreement. But these rules leave consumers lost in legalese, with just 2 in 5 consumers able to answer the most basic questions about a credit card they have just applied for.
The data comes from a new report by Fairer Finance, the independent consumer group, and commissioned by Klarna, the global payments and shopping service. To test the effectiveness of the current rules, Fairer Finance asked a nationally representative group of 30 people who either owned or were considering taking out a credit card to complete a mock online credit card application, which fully complied with current regulations. They then tested the group’s comprehension of the key terms of the credit card with a series of questions and conducted focus groups to draw out further insights.
The findings were startling. On average, just 2 in 5 participants could correctly answer the basic understanding questions. Not a single participant was able to answer the most difficult question (‘what is the fee for withdrawing cash overseas?’), while even the easiest question (‘does this credit card charge an annual fee?’) was answered correctly by just two-thirds of respondents.
A worrying number of participants failed to identify various fees associated with the credit card. 37% of participants either weren’t aware of the 2.9% balance transfer fee or thought there was no fee. 60% either weren’t aware of the 3% cash transaction fee or thought there was no fee. With a £1,000 balance transfer and £20 cash withdrawal, these fees would add up to £32.
Only 43% were able to identify the correct APR. This is an especially important number to keep track of, since if a borrower had a £1,000 balance and paid off £100 each month, on a card with 22.9% APR (the most common representative rate at the moment) they would pay £108 interest, while on a card with 34.9% APR (charged by many credit builder cards) they would pay £167 – a £59 difference.
James Daley, MD, Fairer Finance, commented: “Credit cards are complicated and we’ve long suspected that banks are not giving customers the information they need to understand them. Now we have the evidence to prove it.
“With the Consumer Credit Act under review, now is the perfect time to tear up the current regulations and start again. We need new rules which ensure customers are given the right information at the right time, to help them properly understand the benefits and risks of credit products.”
Alex Marsh, Head of Klarna UK, commented: “Klarna has always fought for the interests of the ordinary consumer and getting disclosure rules right is vital to having well-informed consumers. But the current rules don’t do that. They leave consumers confused and, ironically, pushes them towards expensive and higher-risk forms of credit. With BNPL regulation the government has a golden opportunity to be bold and create new rules to give consumers the right information at the right time so they can make informed decisions.”
Klarna and Fairer Finance plan to discuss their findings with MPs and debt charities in the coming weeks.
