How Confusing Is Your Credit Card?

With fourteen different ways to calculate credit-card interest, it's all but impossible to compare charges, so switch to one of these Best Buys and relax!

According to a new report from Which?, it's not possible to work out which credit card is cheapest simply by comparing interest rates.

Which?, previously known as the Consumers Association, warns that credit-card issuers use no fewer than fourteen different ways to calculate interest charges. That's because the cost of borrowing depends not only on the card's interest rate, but also when interest begins to accrue and when it stops.

What's more, Which? reckons that if all cards had the same annual interest rate, say, 16%, the interest bill for the highest-charging cards would be almost twice as high (83% higher) as that levied by those cards which charge interest for the shortest period. Hence, advertised interest rates are, in effect, misleading customers about the true cost of borrowing on plastic.

For example, the Cahoot credit card, which charges 11.8% a year, appears -- on the surface -- to offer cheaper borrowing than HSBC's credit card, which charges 13.9%. However, the reverse is true: spending £2,800 over a year and paying in full every four months would cost £40 with Cahoot, compared to £38 with HSBC.

Most credit-card firms charge interest from the date when you buy something, while others wait until they've actually paid the retailer, usually a few days later. If you carry forward a balance from a previous statement, some cards ditch the interest-free period on new purchases, even if you pay your latest bill in full.

Some lenders, including HSBC, charge interest on balances from the previous month only until the date that your latest bill is produced, whereas others will charge interest right up to the point that payment is received. Another complication is that most cards charge interest on previously accrued interest, but a few don't. Hence, unless you're a hardcore number nerd, it's impossible to work out how much interest you'll pay before you get your bill!

Which? believes that advertised interest rates are misleading, unfair and mind-bogglingly complex, so it wants card issuers to adopt one standard method for calculating interest. Otherwise, consumers will continue to be fooled by the headline numbers.

For the record, Which? praises HSBC, Liverpool Victoria and Saga for charging interest fairly, while the worst offenders include American Express, Cahoot, Halifax/Bank of Scotland, MBNA, RBS/NatWest/Mint, Sainsbury's and Tesco. That's most of the big players, then!

Finally, if you're fed up with paying interest in all its various forms, why not give yourself a well-earned breather? As I explained in Your Ultimate Guide To Credit Cards, it's a doddle to transfer your existing balances to one of nearly a hundred different 0% credit cards. As a rate tart, you can enjoy up to a year's interest-free credit on transferred debts, although you need to watch out for transfer fees and other tricks of the trade, as I warned here!

More: Check out our deck of delicious 0% deals! | Credit problems? Check your history in our Credit Report centre.

Cliff owns shares in HBOS, parent company of the Halifax and Bank of Scotland.