Millions lost in a plastic maze

BANKS are baffling customers with interest rate calculations on credit cards that are impossible to fathom, it is claimed today.

The result is that consumers are being drawn into a rates rip-off costing them up to £2bn a year, say experts.

Two credit cards appearing to have exactly the same annual percentage rate of interest (APR), impose wildly different charges.

At the same time, some cards giving the illusion of a low interest rate may actually charge much more than others with a higher headline figure. The confusion means it is impossible for customers to compare rival cards and find the best deal.

Meanwhile it is generating huge profits for the leading banks, which are announcing record figures for 2003. They soared 17% to £722m last year at Barclaycard, the biggest credit card provider.

Cambridge mathematician Dr Robert Hunt, deputy director of the Isaac Newton Institute, has developed a formula to unravel confusing interest rate calculations. He said: 'People are wasting huge amounts of money because they can't find the cheapest option. Most believe the APR is an accurate guide to the costs of a card, when it is not. They don't realise the banks have a hidden agenda.'

Dr Hunt said: 'The only way to find out how interest is charged is to read the small print. But you need a grasp of both basic banking principles and legalese. I'm a professional mathematician, but the reality is that it takes an awful lot of time to

unravel the charging system. The result is that consumers cannot make a fair comparison between credit cards in any sensible way'.

Dr Hunt, whose findings are published by the bank Egg, described the 'ploy' of issuing cards which are expensive to use but appear to be cheap because they have a low APR as 'underhand'.

Each card generally has three interest rates, one applying to purchases, a second for cash withdrawals and a third for debts transferred from other cards. On top of that, banks have widely-differing policies on the point at which interest is first charged and for how many days it is imposed each month.

Calculations by Dr Hunt show, for example, that an Egg credit card with an APR of 13.9% costs the same to use as a Halifax One card where the typical APR is apparently better value at 9.9%.

The Egg card is also cheaper to use than a Lloyds-TSB Advance card, which on the face of it has a lower APR of 11.9%.

The real cost of using a card is determined by the type of spending and number of days that interest is added to the outstanding balance.

Dr Hunt has given evidence to a Treasury Select Committee inquiry into credit cards, which found widespread evidence of rip-offs which disguise the true costs.

The committee has put pressure on banks to devise one simple, universal method of calculating interest.

A survey by Egg found some 81% of the public wrongly believed that two cards with the same APR would cost the same to use.

Egg chief Mark Nancarrow said: 'Different methods of calculating interest allow providers to subsidise and suppress the upfront APR they are advertising, creating an illusion they are offering a better deal than is often the case.'

A Lloyds TSB spokesman said last night: ' It is unfair to use the Advance card as an example in this scenario because it is a card suited to people who don't pay off their balances every month.'