Credit card firms profit from late payment fees

Credit card companies are making £400m a year from charges paid by customers who settle their bills late or exceed their limits, a report claims.

The consumer watchdog Which? - formerly the Consumers' Association - which carried out the research, accused card firms of boosting profits through "dubious sales practices and unjustifiably high charges".

Its findings may fuel demands for the Office of Fair Trading to take action on late payment fees. The OFT is already investigating these fees, and is said to have discovered that some card companies appeared to be breaking regulations covering unfair terms in consumer contracts.

If it decides to act, the OFT could demand that late payment charges - typically £20 or £25 - are reduced to amounts representing the actual costs incurred.

Which? said it was not "a few absent-minded people" who were hit with fees when they missed payments or went over their limits. Its survey of 2,000 credit cardholders found that one in four were charged at least once in the last year.

The fees imposed exceeded the cost of dealing with late or missed payments, as the letters sent to cardholders were generated automatically and penalty charges were added to the next bill, said a spokesman.

Late payment charges are common across nearly all card companies. In 2003, MPs on the Treasury select committee criticised firms for imposing excessive fees.

Last year the OFT wrote to eight card providers to ask them how they structured late payment fees. John McFall, the committee chairman, later revealed the OFT had found some companies were using accounting policies and imposing levies that were of "questionable validity".

When MPs on the committee quizzed the bosses of MBNA and other banks at a hearing in October, they were frustrated by the reluctance to disclose the amounts they received in such charges.

Some legal experts have argued that late payment charges are unlikely to be enforced by the courts, pointing out that penalty clauses are legally void unless they reflect the loss the party enforcing them has suffered.

Spurred on by that advice, some cardholders protested about the late fees and have had the charges dropped.

The OFT said yesterday it was still investigating the issue. Which? said late payment fees were one of a number of "shady" practices employed by credit card and loan companies to win customers and wring money out of them. Others include:

· "Risk-based pricing", where some companies advertise interest rates that not everybody will get. Consumers do not know what rate they will be offered until they have applied and been credit-searched. If they decide the rate they are offered is too high, the search affects their credit rating and ability to get credit elsewhere;

· Calculating interest in different ways, making it impossible to compare cards;

· Failing to share full data on borrowers. Lenders use credit reference agencies to check they are not lending to people who cannot afford to make repayments. But not all firms supply the same information, which means that not all debts show up, allowing some people to borrow beyond their means.

Malcolm Coles, the editor of Which? magazine, said: "Lenders seem to have no qualms about persuading people to take on more debt than they can afford, and they will carry on doing it as long as they can get away with it."