Card switches 'cost £1bn a year'

Credit card switching costs the industry £1bn a year

People who switch credit cards for interest-free deals cost the industry £1bn a year, a study has said.

The report's author, Professor Merlin Stone of Bristol Business School, said some credit card providers could not afford to continue offering such deals.

More card providers were applying charges for balance transfers to deter switching, the report said.

In 2003, none of the zero-rate deal cards applied charges for balance transfers compared with 11% today.

Customers who move from firm to firm seeking cheap introductory offers have been dubbed "rate tarts".

New charges

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According to the report, about 4.2 million people have transferred credit or store card balances to other cards - with the intention of clearing them before the interest-free period expired.

But less than two-thirds of people actually managed to switch before the low introductory rate expired, the research found.

The report was commissioned by Capital One, which offers flat-rate credit cards.

Professor Stone said high costs to the industry from introductory zero-rate deals could lead to the introduction of other charges or increases in interest rates.

"Card issuers will also increasingly look to find other ways in which to differentiate, the most obvious being the introduction of standard flat rates of interest," he said.

Debt mountain

Britons owe a total of £185bn on credit cards and personal loans, according to the latest Bank of England figures.

A recent Treasury Select Committee report called for curbs on credit card lending.

Among its recommendations was the introduction of a single method of calculating interest payments.

The government seems to have fallen for the industry line that a standard way of charging interest will limit competition Which? statement

But on Monday, the government rejected this recommendation. The Department of Trade and Industry (DTI) said it believed standardisation would restrict or even eliminate consumer choice.

The DTI also rejected the committee's call for a ban on unsolicited credit card cheques.

Instead, it believes that customers who take out a new card should be clearly told that they may be sent credit card cheques.

Which?, formerly the Consumers' Association, was angered by the government's response.

"The government seems to have fallen for the industry line that a standard way of charging interest will limit competition," Which? said in a statement.

"In fact, it will mean providers can compete on cost and consumers can choose the cheapest card."