Is Your Credit Card Cheating You?

Banking and Borrowing

Updated on 16 December 2008 | 0 Comments

We all know that credit cards charge sky-high rates of interest, but are you aware of this £1 billion-a-year scam?

Please would you do something for me? Grab your latest credit- and store-card statements (or view them online) and take a careful look at the transactions listed. Is there a charge for "payment protection insurance" "card repayment protection" or something similar? There is? Oh dear, I hate to tell you this, but you're one of millions of victims of Britain's biggest (legal) financial scam!

In the UK, we can choose from around 1,500 differently branded credit cards, but every single UK-issued credit card cheats cardholders by overcharging them for credit card repayment protection (CCRP). CCRP is a form of payment protection insurance (PPI) which meets your monthly card repayments if you are unable to work due to an accident, sickness or unemployment, plus it pays off your balance if you die.

Alas, although CCRP appears to offer valuable peace of mind, in reality, it's a pile of pants. Actually, as someone who worked in the PPI market for more than a decade, I'd describe it as "toxic insurance", because it does far more harm than good! Let me explain why I've never bought a CCRP policy, and why I'd encourage you to do the same and ditch your existing policies.

I asked independent financial researcher Moneyfacts to provide me with data showing the cost of CCRP for the credit cards listed in its all-seeing database. In total, Moneyfacts provided me with CCRP premium rates for no fewer than 282 credit cards, including those issued by the UK's biggest card firms. Here's what my research revealed:

The five most expensive CCRP policies come from:

  • Debenhams MasterCard (18% a year);
  • Harrods MasterCard and Mothercare MasterCard (both 12%);
  • Goldfish Card (10.68%); and
  • Four cards issued by CitiFinancial (10.2%) a year.

  • 62 cards charge 9.48% a year;
  • 51 cards charge 9.36%;
  • 4 cards charge 9.24%;
  • 72 cards charge 9.12%;
  • 6 cards charge 9.00%;
  • 7 cards charge 8.88%;
  • 55 cards charge 8.64%; and
  • 9 cards charge 8.40%.

The cheapest CCRP policies come from:

  • Melton Mowbray Platinum Plus (8.16%);
  • Saga (8.04%); and
  • Four cards issued by Bank of Ireland (7.08%) and the Sikh Trust MasterCard (7.08%).

So, being covered by CCRP increases the cost of your credit-card spending by between 7% and 18% a year, with the average premium coming in at 9.15%. Note that full payers (cardholders who pay off their balance in full each month) still pay CCRP premiums on all of their spending, which is a complete waste of time!

Now get this: as a former PPI industry expert, I know the true, underlying cost of this cover. A well-managed CCRP scheme offering reasonable benefits could easily be provided at a cost of, say, 3% a year. This is a sixth of the cost of the most expensive policy listed above, and less than a third of the cost of the average CCRP policy. Furthermore, if you compare the premium rates charged with the benefit paid by these policies, then the profiteering becomes even more extreme, as this article reveals.

A premium rate of 3% a year (0.25% a month, or 25p per month for every £100 owed) would provide card issuers and CCRP underwriters with modest returns, but not the massively excessive profits that they currently enjoy. Hence, they keep very quiet about the true cost of CCRP and, as a result, there are no industry-wide figures on these policies. Hmm, I smell massive profit margins!

My own calculations suggest that there may be up to fifteen million CCRP policies in force, generating annual premiums in excess of £1 billion a year. With 80% to 90% of this sum being pocketed by card issuers as pure profit, the sale of CCRP is one of Britain's biggest financial scandals. Is it any wonder that the payment protection insurance market is being investigated by both the Office of Fair Trading and the Financial Services Authority?

In summary, my advice would be: "CCRP? Just Say No!"

More: Use the Fool to compare credit cards, compare insurance quotes and compare savings accounts.

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