NEWS - CONTROLLING COSTS - 14.02.2007

What’s the true cost of a company credit card?

Recent changes

Interest rates. Major credit card companies are duping customers over the true cost of borrowing at a time when interest rates are on the up. In fact, credit card companies have raised interest rates in response to new rules holding down their penalty fees to a maximum £12. As many as 19 card providers have raised their interest rates in the past three months (you should have been notified in writing if this includes yours). Some rates for withdrawing cash are up by as much as 50%.

Deceptive. But you might not be aware of the extent of the increase if you simply relied on the summary boxes printed on your statements because they don’t have to show the annual interest rate. Several leading issuers including American Express, NatWest, HSBC, Morgan Stanley, Goldfish and SkyCard fail to give the annual cost of borrowing in the summary box. Some don’t give this vital information anywhere on the statement. Trap. Instead, these issuers show only the much lower monthly interest rate which can lead borrowers to believe they are being charged much less than is actually the case.

For example, NatWest’s monthly interest rate is a seemingly innocuous 1.313%. But the Annual Percentage Rate (APR), which shows the true cost of borrowing over a year, is 16.9% - among the highest charged by mainstream lenders. More importantly, showing only the monthly rate can disguise steep rate rises. Take the American Express Platinum card for example, which recently increased its APR on purchases by a whopping six percentage points from 8.9% to 14.9%. But because American Express prints only the monthly interest charged on statements, customers would have seen this as a rise from 0.716% to just 1.167% per month.

True costs

There are various considerations when analysing the cost of a credit card. The most obvious item is the advertised interest rate. However, the true cost of credit cards includes more than a monthly interest rate. Things for you to consider are; the Annual Percentage Rate (APR); interest rates; late fees and annual fees (See The next step).

APR? Obviously, if your company doesn’t pay off the full amount due on the card every month, it will be charged interest on the outstanding balance. An APR will not include other charges such as late fees (if you fail to make the minimum payment on time) or default fees (if you go over the credit limit).

Tip 1. After noticing an increase in interest rate or receiving a change in terms, ask your credit card issuer to provide you with the true cost of borrowing using their card. Also, push for a promotional rate they might be able to offer to lessen the shock of these increases. You could then switch card issuer (when the offer expires). However, get the other one up and running before you cancel your existing arrangement.

Tip 2. The Banking Code says that credit card statements should always carry summary boxes. It also says banks should abide by the spirit of the code, not just the word of it. Always quote the code back at card issuers when complaining.

The next step

For a free tool that shows the true cost of credit cards visit http://companydirector.indicator.co.uk (CD 08.09.06).