MARTIN Lewis has called for an overhaul of the way that interest rates on loans and credits cards are advertised to stop consumers paying more than they expect to.
The MoneySavingExpert founder said the rules around so-called “representative” APRs should be reconsidered, as they can trick people into paying more interest than they realise.
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With a cost of living crisis currently crippling millions of families’ finances, Martin Lewis said the issue urgently needs looking at as unsecured borrowing nears record levels
He said: “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.”
The problem relates to how credit firms are able to describe the interest rates on their products.
Currently firms can advertise “representative” annual percentage rate (APR), which means they only need to offer this advertised rate to 51% of the people who apply.
That means 49% of applicants do not get the advertised rate, and could end up paying more than they expected for borrowing.
Prior to 2011, firms offered “typical” APRs, and had to offer the advertised rate to at least 66% of applicants.
The reduction to 51% was made to bring the UK in line with the rest of the EU.
But Martin said that these rules are worse for consumers, and the old standards should be reintroduced following Brexit.
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A major problem for anyone applying for credit, such as a personal loan or credit card, is that you don’t know what rate the lender will offer you until AFTER you have applied.
Crucially, there is no cap on the rate that can be offered by a lender, regardless of what the advertised rate was.
But any application for credit will show up on your file – so if you get offered a worse rate than expected and don’t proceed, it will still show on your score and could impact your ability to get credit elsewhere.
That’s because lenders don’t like to see too many applications for credit in a small space of time when they’re looking at your file.
Martin said that as a result, people must either take what’s offered even if the APR is higher than expected, or turn it turn and accept their credit file is marked.
MoneySavingExpert warned that consumers could easily end up in debt because of this.
“It felt like a way to reel you in”
Paul Kendall, 57, from Hertfordshire, told how he applied for a personal loan in 2017 that was advertised at 2.9% APR.
While his application for the loan was successful, he was offered an APR of 5.2%.
He said: “I questioned it with the bank and it told me that the rate I applied for was not for everyone, which I hadn’t known before making my application.
“It felt like the lower rate was a way to reel you in – and because a credit check had been done, I felt I had to take the higher rate, as I didn’t want it to affect my credit rating.”
Another MSE reader said he had been offered an interest rate almost three times the advertised rate.
Matthew Davey, 30, from Southampton applied for a loan in 2021 at an APR of 2.9% – and was offered one at 8.5%.
He said: “It made me feel a bit rubbish – especially as my credit score was 999.
“I declined the offer and looked around, but was worried I wouldn’t be able to get credit elsewhere.”
MoneySavingExpert found that 40% of people who had applied for a loan and 28% of those who had applied for a credit card in the past three years have been offered a higher APR than advertised at least once.
Martin said: “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.”
Martin has called for “representative” APRs to be replaced with “typical” APRs again, meaning at least 66% of applicants would get the advertised rate – and potentially more.
He said the difference between the typical APR and the maximum APR offered should be capped.
The money guru said firms should have to disclose the proportion of successful applicants who are not given the advertised APR.
Responding to the report, Chancellor Rishi Sunak 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.”
An spokesperson for the Financial Conduct Authority, which is the industry watchdog, said: “We are continuing our work to ensure that the credit market works well for borrowers and provides the necessary protections, particularly in light of the cost of living crisis.
“We welcome MSE’s report and will discuss the findings and recommendations with them and the Treasury.”
How to improve your credit score
Currently, the better your credit rating, the better chance you have of successfully getting the advertised interest rate on any product.
Everyone has a credit score that is used by lenders or credit card providers when you apply to borrow money.
James Jones, head of consumer affairs at Experian, said: Lifting your score by even a single score band, for example from fair to good, can give you access to a much wider selection of credit products and, importantly, at lower rates.”
There are three main credit reference agencies (CRAs) in the UK: Experian, Equifax and TransUnion.
Each has its only credit rating scale, and may value various factors differently so your score will be not be the same at them all.
Experian, for example, rates users on a scale of zero to 999 and a good score is anything from 881 to 960.
Simple steps can help you improve your credit score, such as making sure you are on the electoral roll and not changing address too often.
Any late payments go on your credit report, so try to pay your bills on time.
Jones said: “A single recently-missed payment can reduce your Experian score by 130 points. I recommend setting up direct debits for all your regular payments to avoid future hiccups.”
Cancel any unused cards and close any accounts you no longer use.
Monitor your score and if you think there’s a mistake, get it corrected.
Plus, here’s how using a credit card could help your finances.
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