1 May 2015
Nationwide’s campaign exposes another credit card rip-off
Britain's credit card market is one of the most competitive in the world, with banks and building societies now offering 0% interest deals for as long as three years. If that sounds too good to be true, then let me reassure you that bankers are not going hungry as a result of these great offers. As with so many financial services products, the profit is made by taking advantage of customers' lack of understanding of how these deals work.
When you transfer a balance onto a 0% card, you're typically charged a fee of around 3% - which is clear and simple enough. But hidden in the small print are a number of traps waiting to catch customers out. The worst of these is the lender's right to withdraw the 0% offer altogether if you miss a payment or two - a penalty that it is totally disproportionate to the detriment the bank has suffered. If you've got a four figure sum on your card, the cost of losing your 0% deal could run to hundreds of pounds.
Even less well publicised is the fact that any spending you do on your card, after you've transferred a balance over to a 0% deal, will be charged interest from the moment the purchases hit your card. This is particularly sneaky, seeing as the government introduced new rules to try and stop these kind of tactics six years ago.
Ignoring the spirit of the rules
Until 2009, if you made a repayment to your credit card, it was common for lenders to allocate that money to the debt that was racking up the least amount of interest - so that they could keep charging you at higher rates for the remainder of your balance. Credit cards are notoriously complex, with most lenders charging three of four different interest rates for different types of borrowing. If you make a cash withdrawal on your card, for example, you might end up being charged interest at almost 30%. Meanwhile, ordinary spending might be charged at, say, 17%, with balances transferred from another card starting off at 0% but reverting to 19% at the end of the deal.
Before 2009, if you made a cash withdrawal on your card, you wouldn't be able to pay off this most expensive borrowing until you'd paid off every penny of debt on the card. So if you had £3,000 on your credit card for which you were paying no interest, your cash withdrawal would be trapped underneath - accruing interest at close to 30% until all your debt was cleared. The government got the industry to agree to stop doing this - and created a rule which said all repayments must go towards the highest interest debt first.
But the banks didn't miss a trick. While they honoured this new order of repayments, they continued to stick to the rule which says they can charge you interest unless you clear your balance in full each month. That means that if you've got some borrowing on a 0% deal, and then spend on your card - you're guaranteed to be charged interest from the moment the transactions hit your card - unless you clear your whole balance, including the 0% borrowing - by the end of the month. This might be legal, but it's not fair. By offering 0% interest for as long as three years, banks are tempting you to use your credit card as a long-term means of borrowing. But at the same time, they keep all their rules for short-term spending in place - which inevitably trips up thousands of customers each year.
Banks are tripping over themselves to offer ever longer 0% deals because they know they'll make good money from their customers' mistakes.
Nationwide to the rescue
The good news is that Nationwide has launched a campaign to put a stop to this. It should be said that for the last six years, Nationwide had been up to the same old tricks as its competitors. But it's finally seen sense and decided to stop taking advantage of its customers in this way - and better still, it's putting pressure on the rest of the industry to stop it as well.
In the same breath, Nationwide is also ditching its £12 fee for people who make late payments. Personally, I've never felt it was wildly unfair to charge people £12 if they didn't make a payment on time. In fact, it was the Office of Fair Trading who came up with £12 - which was a massive reduction on the fees that used to be charged.
Nevertheless, I wholeheartedly agree with the principle that profiting from people's mistakes is not great business. If payments aren't made on time, then interest racks up - and presumably card providers still make good money. Additional charges just add insult to injury and leave people feeling like their banks are mean. So if Nationwide wants to scrap these charges - I'm right behind them - and I hope others will follow.
It's great to see Nationwide back on the front foot - using its muscle to embarrass its competitors into treating their customers fairly. Fifteen years ago, when I first started as a financial journalist, campaigning seemed to be second nature to Nationwide. Its biggest victory back then was the abolition of charges for taking your money out of cash machines that didn't belong to your bank. It was a massive win for the consumer - saving people time and money.
Its latest campaign may sound a bit niche - but it's a perfect example of a practice which is commonplace and isn't fair. I hope it's got more just like this up its sleeve.