FOOL'S EYE VIEW
Cool for CATs

By Jane Mack (TMFJane)
April 25, 2001

You may have heard that the Government is planning to impose a benchmark for bank accounts and credit cards in an effort to stop the financial services industry from taking advantage of the more profligate spenders among us. A consultation paper on the subject has been doing the rounds in recent weeks and The Motley Fool thinks that many of you are in a great position to pass comment on it directly.

Consumer debt is on the rise and the Government is concerned that easy credit and high interest charges are exacerbating many of our personal debt problems. There has also been widespread criticism of the confusing array of financial products on the market. Did you know, for example, that there are 1,300 different credit cards for us to choose from? Yes -- one thousand, three hundred! It's not surprising that many of us shy away from trying to understand even the most basic of financial issues.

CAT Standards

The use of the CAT standard might go some way towards making life a bit easier for us. The CAT standard was first introduced with the ISA a couple of years ago and it restricted Charges, ensured easy Access to funds and demanded clear and simple Terms. If an ISA met those standards the industry was permitted to describe it as a CAT-marked ISA. The fact that the public has bought into CAT ISAs in droves -- around half of all money in ISAs is in CAT-standard products -- is clear evidence that the benchmarking system has proved rather successful. Customers know where they stand. Similar standards have been introduced for mortgages and recently, we've had the introduction of the Stakeholder Pension, which is also subject to CAT-like restrictions.

The industry is not particularly happy about these changes, of course, because it restricts their profits, but from the Fool's point of view, it's a jolly good thing. After all, we support simple and transparent charging systems and low interest rates on borrowing so we welcome the idea of CAT standards for bank accounts and credit cards.

Credit card tricks

Let's look at some common problems with credit cards as an example. There are 23.7 million of us with credit cards in the UK and, between us, we're carrying £30 billion worth of debt on those cards. It's a lot of money. And, in some cases we're paying as much as 30% in interest payments, many of us without realising it! To a certain extent this is down to a lack of public interest in how the industry operates but it's also because we're often taken in by some of the tricks of trade that are used.

One favourite is to show only the monthly interest charge on your statements. For example, my latest statement says charges are 1.43% pm. Wow! That looks really cheap. And yet that actually translates to an APR (Annual Percentage Rate) of 18.6%. That is not so cheap – but nowhere on my statement does it say my borrowing is costing me 18.6% a year. (Of course, being a Fool I don't actually have any credit card debt, but you take the point.)

A personal bugbear of mine is that the credit card industry often increases our borrowing limits out of the blue. Some of them even send so-called "cheques" to cash when these cheques are really just a hidden way of persuading us to borrow more money. As it happens, I got one of these "cheques" in the post on Monday for the magnificent sum of £5,000. Anyone desperate for money would probably have cashed it without necessarily thinking about what they were committing themselves to or what it would actually cost.

Have your say

It's these little tricks that the Government wants to stop and they've produced a consultation document on the whole issue of how and whether to control the industry. They want to know your views and you've still got a few days in which to express them. As you'll see when you read the document, the CAT proposals for credit cards include clear information on interest rates, restrictions on penalties for late payment or for exceeding the credit limit and no links to repayment protection products. The benchmark for basic bank accounts would include free banking for everyday transactions and no overdraft facility.

The important thing is that you read the consultation paper and respond. It's easy to whizz through and is actually rather fascinating. See what you think.

You can e-mail your comments here. If you have an opinion, then this is your chance to express it. You never know – one of your suggestions might actually change the face of banking and borrowing in this country. Comments need to be in by the end of the month so get your skates on! Let us know what you've said to them by telling us on the Fool's Eye View Discussion Board.

Where Next?

Standards for Retail Financial Products 
Get out of Debt Centre
Credit Card Discussion Board