A report by the Office of Fair Trading (OFT) found that 70% of consumers who have taken out a credit card in the last three years did not shop around at all.
The research follows a super complaint from consumer group Which?, in April 2007 that highlighted that consumers choose credit cards without understanding all the issues that affect the cost of the card. There is no standard calculation method, and each interest calculation method used has an effect on how much interest is charged. This results in the potential for credit cards with the same Annual Percentage Rate of interest (APR) to cost consumers widely differing amounts when used in similar circumstances.
The OFT said cardholders were "throwing money away" by not comparing cards before making an application, and losing £400m a year by not understanding calculation methods.
"The consumer is faced with a less-than-straightforward choice due to the number and complexity of the products," the OFT said.
According to the survey, the most common reason for consumers choosing a particular card was that it had been recommended by their bank (32% of all respondents), and the complex nature of credit cards and financial products in general adds to the difficulties which consumers face when attempting to choose a credit card which best suits their needs.
Other research suggested that for all the flexibility of credit cards, consumers often chose cards on the basis of only a few criteria. One piece of research suggested that a typical consumer selects a credit card product based on the brand, annual fee, interest free period, affinity or rewards benefits, and the stated interest rate if the consumer expects to pay interest in the immediate future.16 Because those terms are often contained in the advertising materials (such as leaflets and mailshots), consumers may be unlikely to read the contract. A typical consumer may therefore not consider the terms defining or explaining the consequences of late payment or excessive borrowing.
People least likely to shop around are pensioners, people on low incomes, and those without access to the internet.
It cited a report which calculated that the average customer stands to lose £137 a year by choosing the average priced credit card rather than the cheapest.
The OFT rejected the call for a standardised calculation method for APRs, but said it was apparent that consumers needed more help and encouragement to shop around.
Following work with Which? and the card industry trade body Apacs, it recommended four major changes:
· the introduction of an independent credit card price comparison website run by the FSA
· improvements in how information is presented in credit card issuers' summary boxes
· standardisation of terminology used by credit card issuers in their product literature
· improvements to consumer education about the benefits of shopping around for a credit card
The OFT's chief executive, John Fingleton, said: "No one wants to throw money away, but consumers who don't shop around for credit cards are doing just that.
"It is essential that consumers are given the right tools to make comparisons between credit cards more easily, and we can achieve this through some of the recommendations announced today, which have received widespread support from the FSA, Apacs and the rest of the financial sector."
Apacs welcomed the OFT's report and said it would be working with the FSA to deliver the comparison site, which it said would be an important tool for consumers.
Sandra Quinn, a spokeswoman for Apacs, said the recommendations would build on changes the industry had already made, including the introduction of summary boxes on all credit card marketing.
"We are backing the OFT in hoping that these proposals will spur customers on to make better decisions, by building upon the work already undertaken by the industry to make credit card products more transparent," she said.
While welcoming the OFT’s move, some believe it did not go far enough.
Jeremy Wood, director for banking and credit cards at Nationwide, said: "For too long many credit card providers have got away with applying an adverse order of payments to their customers and we hope this new comparison site will address this sharp practice.
“Many credit card providers use low introductory rates to lure people into opening an account. These offers can look very appealing, but when you scratch beneath the surface, you discover that credit card holders often don't receive the full benefit of these low rates. Most providers apply repayments to the cheapest debt first making it more expensive for consumers and more profitable for the banks."
Which? chief executive Peter Vicary-Smith said: "There's no way to make comparing credit cards as easy as it should be unless you standardise the way interest rates are calculated.
"The OFT has missed the chance to insist people are given a way to compare cards they can actually understand."