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Credit cards: interest pricing differences need a shake-up

27th June 2005

Nationwide has called on the UK government to stamp out unfair credit card pricing practices.

Differing practices of credit card issuers in setting interest rates have attracted a lot of criticism lately, and the Nationwide Building Society is calling for greater action against this under the Consumer Credit Bill. However, while such practices clearly need to be eliminated, direct regulation is not the only solution.

As the Consumer Credit Bill is to undergo detailed consideration by a special committee of UK MPs, the Nationwide Building Society has taken the opportunity to voice its opinion that the bill should go further.

In particular, Nationwide would like to see practices such as the order of payments on credit cards, which allows providers to allocate first payments to balances accruing the lowest level of interest, outlawed.

Criticism of credit card charging practices is nothing new. Indeed, a Treasury Select Committee has been looking into the issue for almost two years. Much of the criticism has centered on the notion that methods of calculating interest rates need to be more transparent. This claim is largely justified. Certainly, card issuers adopt different practices in terms of the order of payments, the length of the interest free period, the point from which interest is charged and the point at which interest payments stop.

Thus far, issuers have taken the stance that to standardize interest calculation would remove the very elements of pricing on which players compete. Yet most consumers are simply not aware of the variances between the different interest calculation methods.

There is no doubt that these different practices cannot persist. The question is whether change will be brought about by direct regulation, as suggested by Nationwide, or whether there is scope for the industry to self-regulate, as with the suggestion that players submit a set of voluntary standards from which they may deviate as long as this is made clear to customers.

The second path looks the better option. Direct regulation could prove costly and seems rather unnecessary given that the industry has already shown that it is prepared to improve and make its practices more transparent. Not regulating through the Consumer Credit Bill may seem like an opportunity missed, but it will not mean that the issue goes unresolved.

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