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By Russell Cavanagh
Staff Writer, 16 September 2008
THE Annual Percentage Rate ("APR") figure on credit products, including credit cards, includes not just chargeable interest but also required fees, e.g., annual membership costs.
APR is also referred to as the "total cost for credit" and must be clearly explained and referred to in all advertisements or printed matter as "APR". Based on the cost for purchases, APR doesn’t take into account cash transactions, balance transfers or their associated fees. How does it work?
Interest and fees
Average APR on credit cards currently stands at 17.4% in the UK. Borrowers with a good credit history should be able to get deals below this figure and it’s worth comparing credit cards using the tables on this site to find the best deals available. The Barclaycard Platinum and Capital One Low Rate cards both carry APR’s of less than 9%.
In calculating APR, creditors base their advertised figures on an assumed average borrowing of £1,500 (this is higher for "prestige" cards, often labelled "Gold" or "Platinum").
The standard rate of interest is usually charged on purchases only (e.g., for goods and services).
While some credit cards have initial 0% purchase periods usually lasting between three and 12 months before standard interest applies, the quoted APR calculation ignores such deals.
Withdrawing cash at ATMs, buying foreign money or travellers' cheques and any purchases at all associated with gambling (including refreshments in casinos) as well as balance transfers are not included in the APR calculation and neither are their transaction fees.
Most credit cards charge different - usually higher - rates of interest for cash transactions whilst others may have varying rates, including 0% interest deals, available on balance transfers.
Where interest is applicable, it usually only kicks in if balances aren’t repaid in full before the end of the month or within agreed periods (sometimes 56 days). Cash withdrawals and credit card cheques are usually best avoided as they carry higher interest rates that start running from the date of transaction and are payable whether or not you clear your balance in full.
APR and the law
APR will be included in credit agreements and pre-contract information. This is to help borrowers compare the cost of different credit products when choosing. APR is worked out over an annual basis.
The Consumer Credit (Total Charge for Credit) Regulations 1980 govern the rules for calculating APR. With credit cards, the Consumer Credit (Advertisements) Regulations 2004 and the Consumer Credit (Agreements) Regulations 1983 (as amended in 2004) form the basis of law dictating how creditors must apply and explain APR.
The Consumer Credit Act 1974 stipulates the rules on APR for all regulated credit agreements and the above regulations are supplemental. The Office of Fair Trading regulates the credit market, monitors complaints against wayward creditors and decides on their suitability to hold a consumer credit licence.
Summing up
The law is now clearer on the duty of creditors to explain how APR is calculated and applied.
Further changes due in October 2008 mean that credit card companies also need to disclose how card repayments are allocated to any balance owed – usually crediting the cheapest deals before settling more expensive items. This is all designed to make comparing and choosing credit products easier and safer for consumers.
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