CREDIT CARDS

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The Competition Commission inquiry into store cards will investigate interest rates. The probe will look at whether interest rates reflect firms' operating costs, and if the rates are "consistent with a competitive market". Store cards have been criticised by consumer groups, as rates can be up to 30 times higher than credit cards.

The £4.8bn a year industry is being investigated, following a referral from the Office of Fair Trading (OFT). Other details of the inquiry were given in a statement outlining its terms of reference. The Commission said it would also investigate the relationship between store card providers and retailers.

It will also look at whether consumers who use store cards are sufficiently aware of the costs of using them, particularly the rates of interest and other charges that maybe levied. The commission said it had so far written to more than 350 groups, including retailers, store card and credit card providers.

"This is a complex inquiry examining a multi-million-pound industry which affects a large number of people and so it's a big responsibility for us to get it right," said Professor Paul Geroski, chairman of the Competition Commission and the store cards inquiry.

John Vickers, chairman of the Office of Fair Trading (OFT), had pledged to look into the market when he appeared in front of the Treasury Select Committee's inquiry into credit cards and store cards. The OFT's subsequent report found that features of the store card market "prevent, restrict or distort competition."

Capital One is charging its customers interest for cash withdrawals even when the bill is paid in full each month. Because of the way the statements are drawn up, it's unclear to customers that they're not paying off the cash withdrawal while they continue to use the card to buy things.

They're being charged daily interest, usually at a rate of 20.5%, on all cash withdrawals made from machines. This practice has been happening for six months and Capital One said it notified all customers in advance when it made the change to the way it charges interest and takes payments.

If in one month a customer has spent £100 on their card, and also took out £50 in cash, their statement would show a total to pay of £150. If that customer then sends in £150 by the due date, Capital One will take the money and pay off the £100 of goods. That leaves £50, which you might think pays off the cash amount. But that's the snag.

Capital One the uses the £50 to pay off anything that's bought more recently with the card, even after the statement is issued. Only if there's anything left after that does any of what you're paying to settle your monthly bill go towards paying off the cash withdrawal.

The result is that as long as you keep using the card the cash amount might never be paid off, or only be paid off slowly. To make matters more complicated, card holders will not ever see the unpaid cash amount on future statements. Capital One said the rule change would have a "minimal effect" on its cardholders but credit card expert Martin Lewis is deeply concerned by Capital One's treatment of customers.

He said, "This is one of the most abominable practices I have ever seen in the credit card market. I have never heard of this being done before and cannot find any other examples. It should be made illegal." Mr Lewis is worried that unless this practice is stopped, Capital One could start a trend. He added, "The worry is other providers will see it as a nice money-maker and jump on the bandwagon."

If you have used your Capital One credit card for cash, read your statements carefully. If you notice unexpected cash interest on your statement, phone Capital One and ask them for a "settlement figure". This will include the unpaid cash advance.

But, if you use your card before the payment is processed, you'll be back to square one. If you do use your card for cash, put the card away for two months after sending your payment. Only then can you be certain that the cash advance has been paid off.

Credit card company MBNA has introduced annual fees for some of its customers, but refuses to offer any explanation. MBNA appears to be penalising customers who clear the outstanding balance each month to escape paying interest. Fees of up to £25 will be charged, it is believed, from November 2005 but bizarrely, the whole issue is covered in a veil of secrecy. When asked for an explanation, spokesman Paul Lawler would say only, "This is a matter between ourselves and our customers." He did volunteer the information that 'a small number' were involved, but would not say how many or even what percentage would be affected.

Would the company be changing the terms and conditions affecting its cards? No changes were planned, said Lawler, adding that fees were already charged on some MBNA cards. Was it true that customers who paid their bills in full would be affected by the new fees? "We are not commenting on the specific details of what we are doing," was the emphatic reply. Daniel Newbolt at Moneyfacts, the country's leading financial data supplier, was not impressed. He said the introduction of the annual fee was a backward step. "Annual fees on cards have pretty well died the death. I would certainly not apply for a card with an annual fee unless it was offering some spectacular extras, because there are so many alternatives without fees." he said.

He added, "This is an opportunity to get back money from existing customers who are paying off their bills in full. If you introduce a new fee you are banking on them not moving, because existing customers are likely to stay where they are. I would probably move." For some time, credit card companies have been quietly cutting back on 0% balance transfer deals or imposing a fee of about 2% of any sums switched to a new card. This is meant to deter so-called rate tarts, customers who switch each time their 0% interest offer comes to an end.

MBNA's new fee sends out a different message, this time to customers who have the good sense not to waste money on monthly interest payments. The message is: There is no such thing as a free credit card. Happily, not all cards are the same and if you are not carrying a debt on your card, switching should be a doddle. (Source: Mail on Sunday)

Banks have dramatically pushed up the interest charged on credit card cash withdrawals. A year after the Office of Fair Trading put a block on unfair and illegal penalty fees, the banks are taking revenge by increasing the cost of using a credit card in a cash machine. A study by the personal finance website Uswitch.com found that the average APR for cash withdrawals has gone up from 20.83% in May 2005 to the equivalent of 27.06% today.

As well as increasing the rates, banks have also reduced the interest-free period on their cards and some have gone as far as introducing annual fees. Uswitch claims that the rising interest rates mean that consumers are paying at least £41 million a year extra. As many as 730,000 people take out money with a credit card on a regular basis but they are often unaware that this is the most expensive way to borrow. Many customers are also unaware of the increasing interest rates.

Consumers are paying £1.45 billion interest on credit card cash withdrawals a year, says Uswitch, up from £1.12 billion just 22 months ago. Nick White, director of financial services at the website, said, "Consumers could be forgiven for thinking that they are being treated as the banking industry’s personal ATM. It’s easy to see why the major banks continue to announce record profits, which this year alone totalled in excess of £40 billion, when the welfare of their customers continues to take a backseat to shareholders."

Uswitch says a change in the way APRs are calculated means the figures listed on marketing material underestimate the true cost. Consequently, while the advertised headline rates of some card companies appear to have come down, Uswitch says the figure has actually increased. The change in interest rates is just one way in which the firms have tried to push up charges. LloydsTSB, for example, recently introduced a £35 annual charge for around 50,000 customers. (Source: Mail on Sunday, Mar/07)