OFT rules credit card late fees 'unfair

Credit card holders who make late payments are paying more than £300m a year in unlawful charges, the Office of Fair Trading ruled today.

The OFT said late payment charges generally were set "at a significantly higher level than is legally fair", and that companies must revise their penalties in line with new rules it set out today.

The watchdog said charges should be used only to cover the cost of dealing with a late payment, such as postage and staff costs, and not to create a profit.

It added that the principles for calculating penalties should also be applied on bank overdrafts, store cards and mortgages.

Credit card companies routinely charge up to £25 for late repayments, but the OFT said that in future, where default charges were higher than £12 it would presume they were unfair, and challenge the company unless there were "exceptional business factors" behind the charge.

The watchdog added that just because a charge was below £12, it would not assume that it was fair.

However, only a court can decide if that is the case, so the OFT would be forced to take legal action to prevent a card issuer charging what it believed was too much.

A similar threshold for default charges on other types of credit may be introduced at a later date.

John Fingleton, the OFT chief executive, said: "Our statement of principles provides practical guidance to banks, which increases their incentives to compete vigorously while protecting consumers from being charged unfair amounts.

"We expect credit card issuers to adjust their default fee levels quickly. We have not ruled out future legal action if the market does not respond positively."

Card issuers have until May 31 to respond to today's statement. An OFT spokeswoman said that although most of the eight major card issuers had not accepted the principles for charging, she hoped they would change their mind and there would be a "positive result" for customers.

"Sky high charges"
Consumer groups welcomed the OFT's findings.

Emma Bandey, personal finance campaigner at Which?, said: "We are delighted that the OFT has finally officially acknowledged what Which? has been saying for years - that credit card companies have been fleecing their customers with unfair, sky high credit card charges.

"The OFT has also now given a shot across the bows to banks to ensure their charges are fair too."

Sue Edwards, senior social policy officer for charity Citizens Advice, added: "This announcement from the OFT is excellent news for the many millions of people in the UK who pay banking charges every year.

"We have been particularly concerned about the magnitude of charges on basic bank accounts - which are aimed at the poorest of people."

However Richard Thompson, a partner at PricewaterhouseCoopers and author of its annual study of the consumer credit market, said forcing card companies to cut default fees may just result in consumers facing higher charges elsewhere.

"The consumer credit industry is being subjected to a number of separate inquiries by different regulatory bodies," he said.

"There is a danger that the different inquiries are targeting the same profit pool. The impact may therefore be a waterbed effect, whereby costs are simply transferred from one group of consumers to another." Mr Thompson added that the assumption that card companies were making excessive profits from their customers seemed "dubious".

"Although base rates have come down in the last five years, the average APR charged by credit card issuers has fallen much more quickly.

"Already weakened by competition, the profitability of the credit card industry in the UK has also recently been hit by an increase in bad debt."