Credit card companies are bumping up interest rates and introducing swingeing
new charges, following the decision by the Office of Fair Trading to crack down
on late payment penalties.
Earlier this year the OFT forced credit card companies to limit late payment
fines to just £12; previously many of them had been charging almost three
times this amount. At the time it claimed that these penalties amounted to "illegal"
and "unfair" charges.
Reducing these penalty fees will cost the credit card industry an estimated
£300m a year. Not surprisingly, card companies are now looking at alternative
ways to recoup these profits.
Nick White, the head of personal finance at uSwitch, the comparison website says: "Of course banks and credit card companies aren't going to sit back and accept lower profits. They will look other ways to make this money."
The OFT ruling can into force in April. Since July this year 11 major credit card companies have increased fees, introduced new charges or upped interest rates, according to research by uSwitch.
One of the most common ways of raking in additional profits is penalise customers who use their credit card to withdraw money from cash points.
As canny consumers will know, credit cards should only be ever used to withdraw money in an emergency; this has always been one of the most expensive ways to access cash.
Most credit card companies already charge a fee to withdraw cash – typically 2 per cent of the money withdrawn. A number of card companies, including First Direct, Lloyds TSB and RBS have increased this fee to 2.5 per cent, while MBNA and Capital One have upped it to 3 per cent.
Card companies are also increasing the interest rate charged on cash withdrawals. The interest rate is usually far higher that the rates charged for purchases made in shops or over the internet. And remember there is no interest-free period on cash withdrawals, interest is added to your card from the moment the £20 notes leave the hole-in-the-wall.
First Direct now charges 20.7 per cent interest on cash withdrawals; previously it was 17.9 per cent. Whereas Barclaycard has pushed its cash interest rate up to a whopping 27.9 per cent from 21.9 per cent.
Credit card companies are also looking to squeeze more money from "rate tarts" - customers who regularly transfer debts from one card to another to take advantage of short-term introductory deals.
Over the past year or so many card companies have introduced balance transfer fees, so customers switching cards have to pay a small fee, usually capped at £50. However a number of providers (including RBS and Marbles) have reduced this cap, and others have increased this fee. For example MBNA and Halifax now charge a 3 per cent balance transfer fee while Lloyds TSB has raised its fee to 2.5 per cent (all previously charged 2 per cent).
Some card providers have even introduced new charges. Sainsbury's Bank now charges £5 if customers want a duplicate statement, previously this service was free. First Direct will impose a £5 fee for unpaid cheques or bounced direct debit, again there was no charge for this before.
Most experts predict that other credit card companies will follow suit, introducing new fees and increasing interest rates on both purchases and balance transfers.
White says: "Unfortunately, these developments come as no surprise and will no doubt continue to happen across the credit card industry. With this in mind, consumers need to be alert when taking out a new credit card. Don't get carried away with the headline grabbing rate, as it's the underlying charges that are a greater cause for concern."
White adds: "The OFT's decision to force credit card providers to reduce default charges was undoubtedly a victory for the nation's 30.6m credit card customers, the card issuers' responses elsewhere have not been so welcome."
He points out that while banks have lost millions as a result of the OFT ruling, credit card companies are still raking in profits to the tune of in £379m a year.
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