Lenders hold the trump credit cards

Barclaycard and Capital One are angry over an NOP poll claiming they are hoodwinking customers on rates, says William Kay. They say the difference in rates for risk-based lending depends on the record of individual borrowers

Egg, the Prudential's online financial services business, has brought outraged protest from banking rivals by publishing a controversial survey accusing so-called risk-based lenders and credit-card issuers such as Barclaycard and Capital One of "hoodwinking", and "knowingly misleading consumers with promises of attractive headline rates which only a small minority appear to get".

Egg, the Prudential's online financial services business, has brought outraged protest from banking rivals by publishing a controversial survey accusing so-called risk-based lenders and credit-card issuers such as Barclaycard and Capital One of "hoodwinking", and "knowingly misleading consumers with promises of attractive headline rates which only a small minority appear to get".

Risk-based lenders offer loans or credit cards with interest rates tailored to an applicant's credit-worthiness. This American idea is rapidly growing in Britain, because its supporters say it enables poor-risk borrowers to obtain loans that would otherwise be denied them, even if they have to pay up to 30 per cent interest. Egg and other lenders which quote a single interest rate say their customers know where they stand. But if a would-be borrower fails their credit tests they are turned away.

Egg commissioned NOP, the respected market research organisation, to "mystery-shop" lenders and credit-card issuers. They found that only one in 10 potential borrowers were offered the lowest advertised rate and seven in 10 were not told at the outset that the interest rate they would pay depended on individual circumstances.

NOP sent 200 researchers to call four companies, Barclaycard, Capital One, Abbey National and Lombard Direct. They said they were employed and had lived at the same address for at least six months, and wanted to borrow £5,000 over three years.

Only 4 per cent were offered Barclaycard's lowest advertised rate of 11.9 per cent, and the average was 18.6 per cent. Only 32 per cent of those applying to Capital One were offered the lowest rate of 11.5 per cent. The Committee of Advertising Practice's guidelines say at least 50 per cent should have that opportunity. The average rate offered by Capital One to NOP's inquirers was 14.8 per cent.

At Lombard Direct, part of Royal Bank of Scotland, no one was offered a personal loan at the lowest rate of 6.9 per cent, which is also advertised as their typical rate. The average was 8.5 per cent. Only 4 per cent of the NOP team were offered Abbey National's lowest advertised personal loan rate of 6.6 per cent, and the average offered was 8.1 per cent. Mark Nancarrow, chief executive of Egg UK, said: "How many consumers would buy a hi-fi from a shop with a price tag reading 'Price agreed after purchase'? In fact, would anyone be willing to buy any product when the exact price will not be unveiled until after they have committed to buy? We believe this is yet another example of consumers being duped by UK banks, this time by dazzling headline rates which often fail to sparkle."

The four lenders responded furiously, particularly the two offering personal loans. Pankaj Talwar, Abbey National's head of consumer credit, said: "NOP's report for Egg is flawed in many respects. It is based on a very small sample, which represents a fractional percentage of the number of internet loan applications we receive every month.

"They have also not used the same person or indeed profile across each brand and these factors are important when ascertaining a customer's rate. We also reduced our rates during their research period, which means the results are even more misleading. The findings do not bear out what actually happens with real customers. Last month, more than 70 per cent of customers who took out a loan for £5,000 or more with Abbey National via the internet were offered the typical rate of 6.9 per cent or better.

"By offering customers different rates according to their individual circumstances, we are able to offer the majority of people a best-buy rate because they do not have to subsidise other customers. By flat pricing, Egg is potentially making customers with a good credit rating pay more than they would have to under an individual pricing approach. For example, typically a customer applying for a loan via the internet of £10,000 over five years would be £812 better off with an Abbey National loan than with Egg."

Lombard Direct said: "The findings are extremely misleading, because they phoned for a rate that is clearly available only over the internet. The majority of customers who apply to Lombard Direct get the typical rate advertised, regardless of how they apply. On the internet, the typical rate is 6.7 per cent and on the phone this is 7.4 per cent. Last month, when the research was done, well over half of our customers got the typical rate, whether they applied on the phone or on the internet. It is standard industry practice to offer different rates by phone and on the internet. We make the difference clear. For example, our press advertising refers only to the phone rate. The rate used in the phone research was advertised only on the Internet. We have also reviewed our website and although the internet rate is advertised only there, we are making it even clearer this is available only by applying over the internet."

Barclaycard's spokesman said: "The risk-based approach is standard practice for insurance and mortgages, and credit card lenders are having to manage their risk the same way. You can either exclude people or offer different people different rates. Egg does it one way, we do it the other, and our way allows us to be inclusive."

The US-owned Capital One said: "We offer value to customers, whatever their credit history. We offer the best card we can to every applicant, and our marketing is clear and accurate and fully compliant with all requirements. Where we state a rate is our typical rate, we are advertising our typical rate for people responding to that advertisement, as required by law. For example, the typical rate given in our TV advertisement is the one we expect to give to the greatest number of people responding. We offer some unsuccessful applicants an alternative card, but only after they are assessed against the product for which they applied. Egg makes no suggestion that the 50 mystery shoppers who called Capital One all had perfect credit ratings, and we are confident our decisions were accurate.

"Someone who applied for an Egg card at 9.9 per cent a few years ago would have seen their price increase by 4 per cent to 13.9 per cent now. Someone who applied for a Capital One card at the same time would have seen their price drop by 2.25 per cent, with the base rate. Egg's comment on hi-fi prices is misleading, and a comparison to car insurance is much more relevant in that risk-based pricing allows more applicants to access credit and does not punish those who have excellent credit histories by raising the cost of credit for all."

Mick McAteer, senior policy adviser at the Consumers' Association, said: "Risk-based lending could lead to a two-tier market, but that is unstoppable. Our main concern is transparency. If this becomes more prevalent we will need a mechanism to ensure rates are realistic. Being turned down for the best rates could have an impact on your credit rating."

Melanie Stewart, of Moneyfacts, which publishes Best Buy tables, said: "It's a minefield, and it shouldn't be. To get the headline rate you have got to have a fairly good salary. It would be far simpler if there was one rate for each card, and a bank could issue a range of cards at different rates."

'Mind you, I was turned down by Egg as well'

Peter Spiller specialises in fixing out other people's disasters, of the DIY type, but he thinks risk-based loans and credit cards can be a disaster for people desperate to borrow.

"A mate of mine went for a loan at 7 or 8 per cent," he said. "But the rate he was eventually offered was 15 per cent. A lot of people don't realise that's the sort of rate they will have to pay, because they are so flabbergasted to get a card or a loan they don't listen to what they're being charged."

Mr Spiller, 35, who runs his home maintenance business in Wolverhampton, West Midlands, has three credit cards, one of which he keeps for emergencies. But he borrows regularly on the other two, and all three have a set interest rate.

He can be choosy about how and where he borrows because he is single and the only other mouth he has to feed is that of his weimerama, called Zed, left, with Mr Spiller. But he is convinced the risk-based lenders are not looking after consumers' interests and are only after the sort of customer who is going to get into debt.

"I've been offered a couple of cards where they vary the rates," he said. "I've always refused because as soon as they say we will base the interest rate on your credit rating I've asked them to tell me my rating and they won't. Mind you, I've been turned down by Egg as well."