That wasn't the APR I applied for!

By Emma Lunn

If you see a great credit card deal advertised, you might not get the low interest rate flaunted in the ad.

The difference between what you see and what you get is down to a process known as "risk-based pricing." Most major credit card providers employ this practise to some degree. It involves credit scoring applicants to decide which APR they will be offered. The worse your credit history, or the more risky a bet you seem, the more interest you'll have to pay -- even if the advertisement you saw touted a lower rate.

Is this allowed?
The rules around risk-based pricing changed on 1 February 2011. Before that, credit card companies had to offer the advertised "representative" APR to two-thirds of successful applicants -- but could charge the remaining third a higher rate.

But just over two years ago, a European Consumer Credit Directive came into effect, and the two-thirds threshold went down to 51%. That makes it easier for credit card companies to offer more consumers a higher interest rate than advertised.risk-based-apr

The cost
Risk-based pricing means some credit card customers are charged as much 9% more than expected, according Andrew Hagger, personal finance commentator at MoneyComms. MoneyComms performed research on risk-based pricing earlier this year. Assuming a balance of £2,000, that extra 9% will cost the consumer an additional £15 in interest charges each month. On a £5,000 balance, that would be an extra £37.50 per month or £450 per year, Hagger says.

Is it fair?
Some credit card providers don't use risk-based pricing. If applicants don't meet the lender's criteria, their applications for credit are simply declined. So, although risk-based pricing may be frustrating for consumers, it means more applicants will be accepted for cards, albeit at a higher rate.

Card companies have always made lending decisions based on risk, says Sarah Treadwell-Jones, spokeswoman for the UK Cards Association -- and that it's an "inherently fairer" practice that reduces the "financial exclusion" that comes from higher rates of outright rejection.

"Lenders have increasingly moved towards risk-based pricing, where rates are tailored to the individual's circumstances, rather than granting the same interest rate to all applicants," she says.

Avoiding surprises
Worried about getting surprised with a higher rate? Most lenders using risk-based pricing publish the range of rates charged in the card's summary box, a summary of the card's terms that credit issuers are required to provide.

"The summary box will allow the consumer to understand the range of interest rates that are available from a particular provider, which will include an awareness of the maximum rate that would apply," Treadwell-Jones says.

Some card providers may quote you a rate during the application process.

"Some credit card issuers may provide an option for the applicant to receive an indicative price quotation before formally applying, where they would require certain information from the customer in order to provide this," Treadwell-Jones says.

If you apply for a credit card and are offered a lower rate than the one advertised, you can try and negotiate with the card issuer and ask for a lower rate. Also look at your credit history to see what's making you seem like a high risk. There are a number of things you can do to improve your credit rating, such as being on the electoral roll, using a variety of types of credit and paying bills on time.

A survey of low-rate cards
Even cards advertised as "low-interest" cards can hit you with surprisingly high APRs, depending on your credit. The following chart shows the difference between the advertised "representative" rate and the highest possible APR on low-interest cards offered by major credit issuers.

Low-rate cards: What might you be charged?

Card Advertised representative APR
Highest risk-based APR
Percentage difference
Barclaycard Platinum Simplicity  7.9%  9.9%  2%
Halifax Clarity  12.9%  21.9%  9%
NatWest Visa Low Rate
 9.9%  9.9%  0%
Lloyds TSB Advance
 11.9%  19.9%  8%
Sainsbury's Nectar Low Rate Credit Card
 7.9%  9.9%  2%
Source: survey of cards advertised as "low-rate" by major issuers. All terms, conditions and interest rates are subject to change by issuer. Data in the chart are current as of 14 May 2013.

See related: How to react to an interest rate hike, Car hire credit card charges: A nasty post-holiday surprise

Published: 14 May 2013