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Ever applied for a credit card and
then been offered a higher interest rate than the one
advertised?
When you’re looking for or credit card, you may well be
tempted by the rate offered in the advertising. This is known
as the ‘typical rate’. However, these attractive, low
rates of interest are discretionary and lenders can decide to
offer cards to applicants at a much higher rate of
interest than the one advertised.
How the typical rate works
When a typical rate of interest is advertised you will
not know the exact rate you will get until you apply. The
lender will run a credit check on you and offer a rate based
on that, making it difficult for you to shop around. This is
commonly known as 'pricing for risk'.
Many lenders rely on the customer feeling too committed
or lazy to go elsewhere - even if they are not happy with the
rate offered. Applicants will also incur a ‘footprint’ on
their credit record. If you do decide to shop around and make
further applications, you should be aware of the negative
impact this could have on your credit rating.
The Consumer Credit Act covers the use of typical rates
and currently states that at least 50% of borrowers should be
offered the advertised rate of interest. When new regulations
come into force in October 2004, this figure will increase to
66% - still potentially misleading a third of borrowers.
Most credit card companies now include a summary or
honesty box on their leaflets, setting out clear information
on the key features of their offer. If you're in doubt about a
credit card offer, check the small print and ask the lender if
the rate they advertise is typical or priced for risk before
you decide whether to apply.
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