Loyalty is something that most of us value in the people that we choose to surround ourselves with. However, when it comes to being a consumer, all the signs are that loyalty is something that the brands we commit ourselves to tend to take for granted. If you’ve ever looked at advertising by your mobile phone provider, insurer or bank and wondered why the rates and prices you’re seeing are much lower than what you’re currently charged then you’ve seen first hand why it doesn’t pay to be a loyal customer. Now, a new study by Citizen’s Advice has put a figure on this “loyalty penalty,” which could be as much as £877 per person.
Where does the loyalty penalty exist?
The research carried out by Citizen’s Advice covered five different sectors: savings, mortgages, mobile phones, broadband and home insurance. It looked into what new customers pay and what loyal existing customers pay, identifying the difference between these two amounts as effectively a penalty for remaining loyal to a particular bank or mobile phone provider. Across the five markets that Citizen’s Advice investigated it found that a loyal consumer could potentially be paying a loyalty penalty of £877. This includes:
£439 for a mortgage. This is the difference between what a new customer on a fixed rate would be offered compared to an existing customer being moved from a two-year fixed-rate mortgage on to the lender’s standard variable rate.
£113 for broadband. This figure represents the deficit in terms of the cost of the cheapest basic price new deal compared to what a customer would pay for sticking with the same provider after the end of the initial contract period.
£13 for home insurance. Compared to the new customer deals, someone with the average cheapest combined policy would pay an extra £13 after 1 year and £110 after 5.
The total also includes Citizen’s Advice research indicating that loyal customer pay £264 for a mobile phone contract and £48 for a cash ISA, as compared to the rates offered to a new customer.
Why do we pay more?
90% of people believe that they should be rewarded for loyalty. And yet many of us are not very good at spotting when we are not. Citizens Advice found that 39% of us are completely unaware that we’re paying any more for essential services because of the loyalty penalty. 35% say that they just find it too difficult to shop around. 25% say they feel that it’s difficult to get out of a contract for an essential service – i.e. we’re more inclined to stay put even if we’re being charged more because of the perceived hassle involved in switching. Providers in these markets are not exactly being proactive when it comes to informing customers where there is money to be saved either. 75% of broadband customers, for example, are not aware of ever being told that they could reduce what they pay by simply switching to a cheaper deal.
What can be done to change the situation?
Citizen’s Advice has a number of legal powers and has used these to submit a “super complaint” to the Competition and Markets Authority, which has 90 days to respond. It is hoped that the authority will take the opportunity to find a way to stop consumers from paying the loyalty penalty, whether that’s more transparency over how it arises or automatically informing consumers when they are affected.
What can you do right now?
Shop around. There are plenty of price comparison sites that will show you exactly what deals are available to you for the essential services that you need.
Mobile phone. If you’re paying for your handset through your monthly charges, make sure you don’t keep paying the same amount at the end of the minimum contract term when the phone is paid off. Ask your provider for a discount if you’re a longstanding customer – show them what you’d get as a new customer elsewhere and ask them to match it. Switch to a SIM only deal to save money.
Find a new mortgage as soon as you reach the end of the fixed period and don’t end up on the lender’s standard variable rate simply because you don’t make the effort to find a better one.
Switch as often as your contract allows so that you’re always getting the cheapest rate.
Look into online banking, as rates are often better than on the high street. Ask your bank to match what they offer to new customers.
Home insurance. Use a price comparison site to find the best deal on the home insurance that you need for your property.
The only way to avoid falling victim to the loyalty penalty is to be proactive when it comes to shopping around for the best possible deals. Making these savings could mean you stop having to take out small loans to bridge the gap to payday.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley