New regulations adopted by the European Union in 2008 come into effect in the UK from 1 February 2011.  One of the most important changes contained in the new directive is the requirement for financial services providers to include a ‘representative example’ when advertising financial products.

‘Representative Example’ defined

The Department for Business, Skills and Innovation (BSI) guidelines say: “If an advertisement includes an interest rate or any amount relating to the cost of credit, it must also include a representative example. This must contain certain standard information including a representative APR.”

It will apply to the vast majority of advertisements for any product covered under the Consumer Credit Act for credit under £60,260 (loans, credit cards, etc).

What information will be included in a ‘representative example’?

The standard information which will be included in a ‘representative example’ will include:

•    The interest rate – a fixed or variable percentage, applied on an annual basis
•    Any Total Cost of Credit (TCC) charges – details of any fees or charges included
•    Total amount of credit
•    Representative APR

What’s the idea behind a ‘representative example’?

The aim of a ‘representative example’ is, according to the BIS: “to ensure that important information concerning the cost of the credit can be viewed together as a whole, so that the borrower can assess suitability and affordability in the round.”

It is designed to make it easy for consumers to compare the true cost of financial services products from provider to provider and from product to product.  The requirement for the ‘representative example’ to be more prominent than other information on the advertisement also now makes it the most important item on a financial services advert – the APR figure will no longer take prominent position.

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From 1 February 2011, financial services providers in the UK will be subject to a new set of guidelines.  The grandly named Consumer Credit (EU Directive) Regulations 2010 makes various changes to the way financial services companies advertise their products.  One of the most important parts of the new legislation requires companies to include a ‘Representative Annual Percentage Rate (APR)’ on their adverts.

What products do the new rules apply to?

The new Directive applies to advertisements and credit agreements for all loans to consumers under £60,260 excluding  agreements secured on land, certified business loans and investments regulated by the FSA.

It will include items such as personal loans, smaller secured loans and credit cards.

What is a ‘Representative APR’?

Companies can often charge consumers different APRs for the same product.  For example, if credit card or personal loan rates are determined by your credit rating or your income, you may not pay the same rate as someone with a lower income or superior credit history.

APR figures in the UK have also often been misleading as they don’t always take into account certain fees, such as annual charges or credit card ‘balance transfer’ fees.

The Department for Business, Skills and Innovation (BSI) defines the ‘Representative APR’ as: “an APR at or below which the advertiser reasonably expects, at the date on which the advertisement is published, that credit would be provided under at least 51% of the agreements which will be entered into as a result of the advertisement”

In simple terms, where the APR for a loan or credit card can vary depending on an individual’s personal circumstances, the APR that is stated on an advertisement must represent at least 51% of the business that the financial services provider expects to come from that advert.  A representative APR will also take into account other charges associated with the product, for example, balance transfer fees, and will be based on an EU average credit limit of £1,200 (unless known to be lower).

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Many of you will use your credit card almost every day.  And, if you have a business credit card account, it is likely that either you or your employees will be charging expenses to the account on a regular basis.

Using a credit card to pay for goods or services is common.  This is particularly true of companies who use business credit cards to closely monitor expenses and to keep a track of their company outgoings.

One of the advantages of using a credit card (rather than a debit card, cash or a cheque) is that, under credit card legislation contained in section 75 of the Consumer Credit Act 1974, if you have a claim against a supplier for breach of contract or misrepresentation, you will generally also have an equal claim against the issuer of the credit card.

But, does this rule apply to business credit cards?

Section 75 for consumer cards only

The answer is NO.  According to the Financial Ombudsman Service, Section 75 does not apply to business credit cards.  It is the ‘consumer’ part of the ‘Consumer Credit Act’ (which section 75 is part of) that stops the rule applying to business credit cards.

So, if you own and regularly use a business credit card, you will not have an equal claim against the issuer of a card if you do have to make a claim against a supplier for breach of contract.

When the Section 75 credit card legislation does apply

If your credit card is a personal, not a business credit card, you may still be able to claim under the Section 75 rules.  For section 75 to apply:

•    It must be a consumer not a business credit card
•    The cash price of the goods or services must be over £100 and under £30,000
•    The purchase must be made using a credit card (not a charge card or debit card)

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It doesn’t matter if you pay off your balance in full every month or if you only make minimum payments, you can save money if you take the time to compare credit cards. If you pay off your balance every month without fail, then you should choose a card with the best reward or cash back offers to maximise the return on your spending. Some of these cards have perks, such as the Egg Card Visa, which has online retailer offers from the Egg Cash Back Store, you can amass a few freebies as well.

If you carry a balance from month to month, then you should choose the card with the lowest annual interest rate. Be careful of 0% introductory offers, because once that period is over, your repayments above the minimum are applied to your interest-free purchases before the balances on your higher interest purchases are paid (some card providers have changed this ‘payment hierarchy’, so the most expensive debts on your cards are paid off first, ready for new legislation due to come into force in February 2011). In most cases, you’re better off foregoing a card with an initial 0% interest rate in favor of one with the lowest overall interest rate.

One type of card you might consider is one of the so-called green credit cards.  Some of them offer incentives to encourage more environmentally-friendly purchases, such as lower interest on purchases of mass transportation tickets, and discounts on home insulation. You will have to determine whether the savings on your green purchases outweigh the interest you’ll pay on your other purchases to see if you would benefit financially from one of these cards.

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Cash back credit cards are one of the most popular types of reward cards. This is probably because rather than earning “points” or air miles, you earn actual money just from spending with the credit card. The first step to choosing a cash back credit card is to compare credit cards.

The reason that credit card companies offer cash back is to encourage you to spend with the card so that they can earn interest. In most cases, the amount of interest far outweighs the cash back rewards, so card issuers profit nicely. But, if you use your card strategically, you can maximize your cash back rewards. It requires some discipline, but it can pay off big.

The main question you should ask yourself before applying for a cash back credit card is whether you’re willing and able to pay off your balance in full every month. If so, then go for it! If not, you will probably do better by choosing a card with the lowest possible interest rate, so be sure and do a thorough comparison before applying for any card.

Once you have your cash back credit card you’ll earn a little bit of money back every time you use it. While you shouldn’t pile up your card with unnecessary spending, you should use it for as much of your normal spending as possible instead of cash, other cards, and cheques. If you have work expenses that you reclaim, you can earn a lot of money by using your cash back card for these expenses, as long as you are able to pay your balance off in full every month. However, if you do this, there is a chance your employer may consider it a taxable benefit (in which case you’ll earn slightly less cash back, but you’ll still come out ahead).

You should know that while spending on your cash back credit card earns rewards, other transactions, such as cash withdrawals, do not. Furthermore, these non-spending transactions may incur a fee, and high interest rates, even if you pay off in full each month.

Keep in mind that many cash back cards often try to sweeten the deal with balance transfer offers. When you shift a balance to a cash back card, your monthly payments are allocated to repay the (cheap) balance transfer debt first (and this will be the case until new credit card legislation comes into effect in February 2011). This means that your spending incurs interest into which you are locked until the balance transfer is paid off. The lesson is: use your cash back card for spending, but not for cash withdrawals and balance transfers.

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The growing strength of the ‘dual hook’ cards, which combine strong 0% promotional periods on both balance transfers and purchases, has had an impact on the popularity of other card sectors.

The obvious casualty has been the straight purchases cards, which traditionally have had just a 0% promotion for new purchases. They were the favourites of the retailers, who normally offered rewards points on the purchases made with the card.

The Amex Platinum Cash back card still offers 0% on purchases for the first six months. However, it is really a rewards card as it offers 5% cash back for the first three months, up to a limit of £100 per month. Pure purchase cards are now virtually extinct.  Arguably, the current Tesco card, which offers a market leading 0% on purchases for 13 months, is still a purchases card, but it also now offers  0% on balance transfers for 9 months, so has a strong ‘dual hook’ feature.

The other, perhaps less obvious sector to be affected is the low rate card sector. Low rate cards do not offer any 0% periods, but instead offer a low rate of interest across all amounts borrowed. They can be a competitive alternative to a personal (unsecured) loan. The best in market personal loans currently offer about 7.6% typical APR (variable and usually on loan amounts exceeding £7,500), whereas the Barclaycard Simplicity card offers 6.8% typical APR (variable) on purchases and balance transfers, and the Halifax Easy Rate offers 6.9% typical APR (variable). If these cards provide a competitive alternative, why have they become less popular over the last 6-12 months?

It may be more attractive for some consumers to take out a ‘dual hook’ card with a strong 0% purchases element (e.g. 12 months), and once this period comes to an end, roll the debt over on to a strong 0% balance transfer card (e.g. 16 months). This effectively gives up to a 28 month interest-free period in which to pay back the loan amount. When compared with paying a minimum of 6.8% APR typical (variable) over the lifetime of the loan on a low rate card, the combination of strong 0% BT deals and strong ‘dual hook’ cards would seem to account for some of the decrease in popularity of the low rate cards.

When the new Consumer Credit regulations come into force on 1st February 2011, it is likely that low rate cards will become more attractive once again. In the meantime, the rise of the ‘dual hook’ cards has had an impact on different ‘other’ sectors of the credit card market.

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Whether you’ll pay less by getting cheap loans versus using low rate credit cards depends on why you need the money, how much you need to borrow and how quickly you can pay it back.

There are two basic scenarios in which borrowing via a credit card is better than getting a loan.

Firstly, if you are trying to bring down the cost of existing credit card balances, your best bet is often a balance transfer deal with the longest 0% or low interest rate you can find.

It is very important to note that if you use a credit card with a 0% balance transfer to bring down the cost of existing debts, you should not use that same card for spending. The reason is the lender currently (payment hierarchies will change from 01/02/2011) structures repayments so that you pay off your cheaper debts first. The result: your spending is “trapped,” accruing interest until you’ve paid off all your credit card balance, so the 0% balance transfer is more than wiped out by what you’ll spend on interest on new spending on the card. Use a separate card, with a low interest rate, for any new credit card spending.

Secondly, if you want to borrow a small amount, say less than £1,000 to buy a specific item, and plan to pay it back in under a year, you can almost always do better with a credit card. You can find credit cards that allow new customers to spend at 0% for the first year and, if you get one of these, you can do far better than you can with a loan, assuming you pay your entire balance off before the 0% rate ends.

Both these scenarios depend, of course, on your being able to purchase what you need with a credit card. You should not use your credit card for a cash advance in almost all cases, because the interest rates can be very high.

In some cases, a personal loan is the best bet. Most advertised loan APRs are based on borrowing at least £7,500. In most of these cases, you’ll do better with a loan. Look at more than just the interest rate, because some loans with low interest rates will have hidden costs that can substantially add to your total loan costs.

Also, when you see a “typical rate” advertised, only about two-thirds of accepted applicants will get those rates. If you have a low credit score, you may be offered the loan at a higher rate.

The “grey area”, where it’s not always clear whether a credit card or a personal loan is better, is when you want to borrow amounts ranging from roughly £5,000 to £7,500. In those cases, check out 0% balance transfer cards (for lowering rates on existing credit card debt), introductory 0% rate cards (for new spending) and personal loans to select the best deal.

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Over the weekend, the RBS and NatWest brands dropped their 0% balance transfer (BT) periods from 16 months to 15 months. RBS/NatWest is the first major issuer to lower rates on its 0% BT cards since competition between issuers pushed up 0% Balance Transfer lengths to 16 months. Is this likely to start a trend downwards among other issuers, or will others still want to maintain market-leading products to acquire new customers?

As RBS/NatWest was one of the first major issuers to move to sixteen month 0% Balance Transfer cards, they have probably acquired a significant quantity of new customers. At the height of the financial crisis, they restricted their offers to existing customers only, so they have tended to be fairly cautious on the acquisition side. On the other hand, the change could signal that they are concerned that the UK economic recovery is starting to plateau.

They may also be preparing themselves for a slightly bumpier ride as we move into the end of the year and the beginning of next year. The government’s Comprehensive Spending Review, due to be announced on 20th October, is likely to detail significant public sector job cuts. The unemployment rate is tracked carefully by credit card Issuers as there appears to be a direct correlation between the rate of unemployment and the rate of credit card payment defaults. Early next year, the VAT rise to 20% on 4th January will impact consumers’ purchasing power. The implementation of the new Consumer Credit Directive on 1st February 2011 is also likely to impact credit card issuers, although exactly how is still a matter for debate (and will be the subject of later blogs).

Time will tell. It will be interesting to see how the other issuers respond to the RBS and NatWest change and whether it will result in a lowering of market-leading BT periods. Alternatively, other issuers, who have to date this year been relatively quiet, may take advantage and fill the gap. It will also be curious to see whether any changes have any follow-on impact to the 0% Balance Transfer and Purchases, the so-called ‘dual hook’ products (discussed in a previous balance transfer and purchases blog).

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Here are 5 tips for making the most of 0% balance transfer credit cards:

1. The MBNA selection of credit cards usually have an upfront fee for 0% balance transfers, but they offer these deals to existing customers as well as new customers (who are the primary targets for most 0% balance transfer credit cards). Check out the Virgin, Alliance & Leicester, and MBNA cards for 0% transfer deals.

2. Balance transfer offers generally start on the date the card account is opened, so if you don’t transfer your balance immediately, you’re wasting valuable time at the 0% rate. Plus, some companies say that you have to transfer any balances within 60 days of account opening. If you can, choose a card where you can submit balance transfer details right with the application.

3. It bears repeating: shop around. Compare 0% offers on credit card rather than simply taking up your bank on their offer of a low rate card.

4. Find out if the card you’re considering has a lifetime low interest rate on the transferred balance or whether it is short term and choose according to how quickly you can pay off the balance.

5. New spending on 0% balance transfer credit cards is charged at the typical APR (unless the card offers 0% on purchases too). Furthermore, this debt can’t be repaid until you’ve paid off the balance you transferred (this will change in January 2011 when new credit card legislation comes into effect which says that credit card issuers must put repayments towards the most expensive, rather than the least expensive, debt first). Therefore, interest accrues wildly with new spending. You might be better off getting a separate 0% purchase card for new spending and only using the 0% balance transfer card for paying off the transferred balance.

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This week the major UK banks have been publishing their half-year results.  Royal Bank of Scotland (RBS), last but not least, published its results this morning. While the headlines have been focusing on the bank’s return to profitability, the most interesting credit card information was tucked away in Barclays’ results.

The Barclaycard division revealed a 15% drop in profits in its US credit card operation due to tighter US regulation.  The UK is facing similar tighter regulation in the UK, which comes into effect in January 2011. The details and execution will be the subject of later posts on this blog, and are covered in other articles on CompareandSave.com.

In summary, the new regulations aim to provide consumers with greater protection and transparency over charges. The aims are good. If, as Barclaycard’s US results indicate, the sector becomes less attractive to issuers as a result, will it impact on the range of credit card products and innovation we are likely to see in the future?

Early indications from the US would suggest yes, at least initially. APRs have risen, 0% ‘teaser’ periods on balance transfers and purchases have reduced in length, and issuers have rationalised the number of cards in their portfolios. During the first half of next year in the UK we may see fewer, less interesting credit card products emerging. On the other hand, we will have more information about how the various fees attached to our plastic friends actually work. A trade off that may invoke mixed reactions depending on how you currently use your credit card.

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