Credit card charges are coming down

Credit card companies are never short of a trick or two to part you from your money. They may be cutting their charges for late payments and breaches of the credit limit, but there's no reason to put the bunting out yet.

Several major credit card players, including Barclaycard, Halifax, HSBC, Lloyds TSB, MBNA and Nationwide, have announced that they will cut their charges, from £20 or more to £12.

The move follows a ruling by the Office of Fair Trading back in April, which declared that credit card operators must reduce their default charges or face legal action. It said that banks making charges with the intention of raising more in revenue than was needed to cover their own administrative costs were enforcing unfair contracts, and estimated that unlawful penalty charges across the banking industry were currently running at more than an astonishing £300 million a year.

It added that, while it did not know what exactly these costs amounted to in each case, as the card companies all had different administrative systems, it believed that anything above £12 could probably be deemed unfair, and it would "give priority" to investigating default charges above that figure.

No surprises, then, that every card company that has announced cuts to its default charges has cut them to exactly £12. At time of writing, Royal Bank of Scotland, which owns NatWest, has not yet announced what it is going to do, as it says that it is still in discussions with the OFT.

Halifax's parent company said, reluctantly, "While HBOS disagrees with the legal analysis of default fees outlined in the OFT's April statement, we can confirm we will reduce these fees across our credit card product range to £12 with effect from August 1, 2006."

This has annoyed consumer champion Which?. Doug Taylor, the organisation's personal finance campaigner, said, "The Office of Fair Trading said that the suggested £12 charge may not necessarily be fair, but that anything above £12 is likely to be unfair. So, we still do not know whether the £12 actually represents a fair charge, and repeat our call to all providers to open their books to scrutiny and show the true costs involved."

Celebrating lower credit card charges may be premature...

Even with a huge cut in charges in the bag, it is a bit too early for cardholders to celebrate victory, as the card issuers will undoubtedly slap the charges back on hapless customers in other areas, in order to retain their profits.

For example, Barclaycard, the biggest card issuer in the UK, with more than 9 million customers, whose late payment fee is coming down from £20, has hiked the interest rates on its cards from August 1. On that day the penalty charge goes down from £20 to £12. Barclaycard says, "We have to reflect in our pricing the costs we incur in our business."

The interest rate paid by about 10% of Barclaycard customers will rise by between 2% and 5%, within a range of 14.9% to 29.9%, and only customers with the lowest credit risk will get away with paying the lowest rate of 14.9%. Interest charged on cash advances will now soar to 27.9%, from a still pretty expensive 21.9%.

To soften the blow, customers can sign up for a free text alert service to remind them five working days before the monthly payment has to be made that their payment is due.

Among the other card issuers, 0% balance transfer deals, and even those with a relatively modest capped fee, are vanishing quicker than John Prescott's dignity. In their place are balance transfer deals with uncapped fees, such as the Capital One Platinum card, and tricksy deals, such as Barclaycard's 0% on balance transfers until the debt transferred is paid in full - but you need to spend £25 per month, which attracts interest, to get it.

Barclaycard has already, earlier this year, cut the period in which customers who pay off their balances in full have to pay their bill by up to six days, leaving them open to a penalty charge if they don't manage it.

Meanwhile, consolidation in the sector continues. Liverpool Victoria has recently announced that it is to transfer its credit cards over to Morgan Stanley, and MBNA is taking over some more Halifax affinity cards.

The rule is: there is no such thing as a free lunch, and if the default charges don't get you, the credit card issuers will try very hard to catch you another way!

06 June 2006 © Moneyextra.com

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