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The UK Cards Association responds to press coverage on APR levels and minimum payments

22 November 2012

The UK Cards Association today (22/11/12) responds to recent press interest in APR rates across the credit cards market.

Paul Rodford, Head of Card Payments said:

“The UK Cards Association is committed to open and transparent debate around credit card borrowing and repayment – with the industry having recently introduced annual credit card statements to give customers a better understanding of their borrowing costs, as well as new communications aimed at cardholders who repeatedly make low monthly repayments and as a result might end up repaying more on their borrowing in the long run. To ensure a well-informed debate, the Association would like to draw attention to the following facts concerning the current state of the market”.

Please see below:

Assertion 1:

“The Bank of England base rate is 0.5% while the average APR on credit cards is now at 19.1%.”

The UK Cards Association's response:

The base rate and credit card APRs are not linked. Credit cards provide access to a 24-hour global payment and cash withdrawal system. The vast majority of credit card customers are not charged an annual fee for the product or a transaction fees for making purchases. So the APR covers far more than just the cost of funds incurred by the card issuer. While the cost of funds (the rate at which the bank borrows) is one of the costs taken into consideration when APRs are set, it is just one of a wider variety of costs and other factors taken into account.

A card company’s costs include capital costs of providing an open-ended line of unsecured credit; the costs of preventing fraud; debts written off; provision of customer services, statements and cards; and management of a customer’s account.

Assertion 2:

“Those who repay the minimum amount on a credit card debt of £5000 will now repay an additional £692 over the life of the debt compared to a year ago.”

The UK Cards Association's response:

While this is arithmetically correct, it does not reflect the reality of card repayments and how consumers actually behave.

Currently, 61% of people repay their credit card balances, in full, each month, thus avoiding interest payments altogether. Of the remainder, 27% pay more than the minimum payment and only 3% of accounts pay the minimum for 12 consecutive months.

Where consumers have paid the minimum amount frequently, lenders now write to them informing them of the financial risks associated with this i.e. that it will take them longer and cost them more. The reality is that this £692 figure will be the case for virtually no credit card user.

Assertion 3:

“Credit card companies allow customers to pay as little as 1% of the original debt each month.”

The UK Cards Association's response:

This is untrue. The new minimum calculation for all new credit card accounts in place since the beginning of 2011 requires that the minimum payment covers interest, fees and charges plus 1% of the outstanding balance. This ensures that the balance is always reducing.

The average minimum repayment across the industry is 2.8%, a figure that has been static for at least the last six quarters.

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