Is your plastic really drastic?

The major high street banks were forced to defend their credit card charges this week after coming under attack from the Liberal Democrat MP Vince Cable.

He accused the big four banks of colluding to keep interest rates artificially high on their credit cards. He also said the banks had failed to cut their rates in line with Bank of England base rate cuts.

Rates have fallen steeply this year and are now at their lowest since January 1963 when Tory Reginald Maudling was Chancellor and Britain was in the grip of its coldest winter for more than 200 years.

Despite this, says Mr Cable, credit card interest rates remain "sky high".

Twelve years ago credit card rates were double base rates, now the banks typically charge borrowers more than four times for the same service. He called for a wide ranging inquiry into the industry along the lines of a similar investigation in the US.

He pointed to the government-sponsored Cruikshank report which voiced concerns about excessive charging in the credit card industry. "I suspect we have got past the point where the industry can regulate itself. Cruikshank said there should be a financial regulator to cap the various costs charged to the consumer, including credit card charges. But that hasn't happened yet."

Mr Cable's criticism followed warnings from the Office of Fair Trading that debt levels on credit cards had reached worrying levels. The OFT revealed that credit card borrowing stands at almost £40bn and advised consumers to be wary of increasing their debt levels in the current unsettled economic climate.

The banks, which account for 57% of all credit cards, rebutted criticism that compe tition has been stifled and customers had suffered at the hands of an "informal cartel".

Lloyds TSB this week matched high street rival Halifax and many of the new entrants to the UK credit card market with an offer on balance transfers of 1.9% for six months. Barclays and NatWest have in recent months cut their rate for balance transfers to 5.9%. Both firms have said the rate will hold for the lifetime of the customer's debt.

However, standard rates offered by the banks for debts built up from purchases remain much higher. NatWest and HSBC charge 18.9%, Barclaycard this week chopped 1% off its headline credit card rates, reducing interest on its Classic card to 17.9% and its Platinum card to 14.9%.

Barclaycard spokesman Ian Barber says the rate cuts show it has broken free from the other banks and accusations of a cartel are misplaced. "It is wrong to say credit card rates have failed to drop in line with falling base rates. Our rates have tracked the falls in base rates over the past 12 years."

He said the extra risks associated with credit card lending kept rates significantly above loan rates that currently hover around 9%. He also defended Barclaycard against critics who point to a raft of rival cards with lower rates such as Egg, Capital One, Intelligent Finance (IF), Smile and Cahoot.

He says: "There are cheaper options around, but they don't carry the same benefits. We offer a price promise - if you buy a product with the card and see it cheaper somewhere else we will refund the difference.

"There is our free one-year extended warranty on white goods. And our insurance on purchases which travellers on Swissair and Sabena will have enjoyed recently. We are not a no-frills card."

Egg, Capital One and Smile charge 12.9% compared to an interest rate of 9.6% offered by IF and Cahoot.

Mr Cable dismisses Barclaycard's claim that it is fair to customers. He says: "Their rates along with those of the big banks remain excessively high and have failed to track down with base rates."

Research from Intelligent Finance suggests that the failure of the big four banks to reduce the rates on their credit cards following each of this year's six rate reductions could have increased their interest margins on credit cards by more than £300m. That would mean consumers are paying more than £1bn a year extra in interest.