Good news, and the bad, about cuts in penalty charges

Several leading credit card providers this week announced they are slashing their penalty charges in order to avoid the possible threat of legal action.

Barclaycard, Lloyds TSB and HSBC all said they would be cutting their fees for late payment and for exceeding your credit limit from £20 to £12 following a ruling by the Office of Fair Trading. Others look set to follow...unless they want to see the OFT in court.

However, there is a sting in the tail for Barclaycard customers. And experts warned it is likely to be some time before current account customers see their charges fall, despite the OFT saying that the same principles should apply to overdrafts and bounced cheques.

This week's announcements come two months after the consumer watchdog said the current level of charges for late payment of credit card bills and exceeding a credit limit - typically £20-£25 - are excessive, and that, in future, customers can be charged only for the actual costs relating to processing late payments - such as postage, stationery and staff time.

The OFT said that the industry "has until May 31 to respond," and that where the charges are set at more than £12, it will presume "they are unfair, and is likely to challenge the charge unless there are limited exceptional business factors in play".

So, on Wednesday May 31, Barclaycard and Lloyds TSB said they were cutting their fees to...£12. This takes effect from June 28 for Lloyds TSB customers and from August 1 for those with a Barclaycard.

Then on Thursday, HSBC confirmed it would also be cutting its fees from £20 to £12.

Other major credit card providers said they remained in discussions with the watchdog.

The National Consumer Council says the public should "vote with their feet and avoid providers who refuse to make their charges fair".

Nick White at price comparison website uSwitch.com predicts credit card companies will raise their interest rates by at least 2% and reintroduce annual fees in order to claw back some of the revenue that will be lost.

However, that "robbing Peter to pay Paul" has already begun. Barclaycard this week warned that about 10% of its customers - around 1 million people - will see their standard interest rate for purchases rise by between 2% and 5%, within a range of 14.9% to 29.9% APR.

Cash advances will now be charged at 27.9%, up from 21.9%. "This is our response to what the OFT has asked us to do," says a spokesman.

At least Barclaycard is being open and transparent about the fact that it is recouping the money lost by upping other charges. Other card companies are bound to adopt the same tactics.

"Customers most affected by the Barclaycard charges - and indeed those of any providers who decide to follow Barclaycard's lead - are those who pay interest and are a high credit risk. But those customers who generally pay in full but may occasionally miss payments will actually be better off overall," says moneysupermarket. com, another price comparison site.

While consumer groups are keen to see the crackdown extended to penalty charges on current accounts, the OFT is not yet in a position to start getting really heavy with the banks over these.

It would like the banks to make changes voluntarily. If they don't, it will probably carry out a full investigation, and then it will be in a stronger position to be able to order them to reduce their charges or face legal action.