Calls for more credit card applicants to be given advertised interest rate

Did you know that under current credit card APR rules, only 51% of applicants must be given the advertised rate? One consumer group is asking for change.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A stack of credit cards piled on top of each other

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Last week, it was revealed that UK credit card borrowing has hit record levels. The news has seemingly shone a light on current lending laws. That’s because a leading consumer group now suggests it’s time to amend existing APR rules.

Let’s take a closer look at what this all means for credit card applicants.


What’s the deal with credit card APRs?

The annual percentage rate (APR) refers to the annual interest charged to borrowers on credit cards and other types of credit.

In 2011, the UK aligned its borrowing rules with the rest of Europe. Since then, lenders have been able to advertise representative APRs as long as 51% of applicants get that rate.

For example, if a credit card’s representative APR is 9.9%, at least 51% of applicants must be awarded this rate. However, under the current rules, there’s nothing stopping lenders from charging 49% of borrowers a much higher rate of interest.

Unless approved using a credit card eligibility checker, applicants often don’t have the opportunity to see the rate they’ll be awarded before applying. So, if a credit card customer applies for a card because of its low advertised representative APR, and then discovers they’re given a much higher rate of interest, there’s not much they can do about it.

Importantly every credit card application is recorded on your credit file. So, applying for an alternative card after rejecting an unexpectedly high APR is often not the wisest of moves. 

Why are there calls for changes to APRs?

According to Martin Lewis, founder of MoneySavingExpert, “The fact so many people can be charged more than the rate advertised is demoralising and often financially dangerous. Many only find out once they’ve applied, leaving a negative mark against their file – forcing many into accepting the higher rate, or making it harder to find a cheaper deal elsewhere.

“For years we’ve railed against this, and now we have a golden opportunity for change. We are told there will be a Brexit dividend – well, this change was caused by EU harmonisation, so I’m asking the Government to deliver on this one. Lenders tend to make most of their profits ‘from the tail’ – those people who get charged higher rates – and often they’re the ones with weaker finances. They need protecting.”

Lewis goes on to highlight that current APR rules don’t help those already struggling with rising costs. He also suggests the UK should revert to pre-2011 APR rules, replacing ‘representative APR’ with ‘typical APR’. This would mean at least 66% of applicants would have to be given the advertised interest rate. 

He continues: “We can’t give consumers a crystal ball, but we can at least make it so they needn’t take such a stab in the dark. Reverting to typical rates will improve fairness and transparency, as well as helping to protect people’s credit files. Taken together, this should reduce the financial and emotional harms the current system causes.”


What’s the likelihood of changes?

Chancellor Rishi Sunak has indicated that he is behind APR rule changes.

Commenting on the consumer campaign, Sunak says he will ask the Financial Conduct Authority (FCA) to look at the current rules. He said: “It is important that advertised APRs reflect the rate the consumer is likely to receive. I welcome the report by MoneySavingExpert looking at ways that this could be improved, and will ask the FCA to assess the merits of reform in this area.”

Of course, while fairer consumer rules may be welcomed, the representative APR shouldn’t matter if you use 0% cards correctly. That’s because you can avoid interest entirely with 0% cards, as long as you clear them within the 0% period. 

For more on this, take a look at our recent article that explains how to use credit cards the right way.

Are you looking for a credit card? Regardless of whether APR rule changes come into play, if you’re looking for a credit card, then take a look at The Motley Fool’s top-rated 0% purchase credit cards

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »