Q&A: credit card charges

Joe Morgan, of Times Money, on the costs and charges facing credit card companies after the Office of Fair Trading's ruling

What are the credit card charges that the Office of Fair Trading has ruled to be unfair and "disproportionately high"?
If you fail to repay your monthly outstanding credit card bill on time or exceed your agreed borrowing limit, credit card companies will hit you with penalty charges which are typically between £20 and £25. The consumer watchdog says that these penalty charge are too high, on the grounds that they are "more than a genuine pre-estimate of the damages that the card issuer would win in court if it sued the cardholder for breach of contract." Consumer groups point out that the costs a lender incurs if a cheque fails to clear in time are minimal: a late payment letter is automatically generated and the additional charge is simply added to a customer's bill.

Who are the offenders?
The OFT has written to eight major credit card companies, which include Barclaycard, Royal Bank of Scotland, HSBC, Lloyds TSB, Capital One and MBNA. The vast majority of card companies levy default charges. Nationwide Building Society has a more moderate approach, charging borrowers £15 if they pay late or exceed borrowing limits.

Do the credit card companies accept the OFT’s ruling?
No. The card companies maintain that the charges are fair. They maintain that they are presented to consumers in an upfront and transparent way.

What happens next?
The card companies have three months to respond to the OFT’s ruling. The watchdog then has powers to take card issuers to the High Court to force them to reduce their fees.

Do the banks have much to lose on this issue?
Yes. Research by Which?, formerly known as the Consumers' Association, estimates that credit card companies make £400 million a year from late payment and over-limit charges.

How can I avoid these penalty fees?
One way to guarantee you will not be stung is to set up a monthly direct debit which pays the minimum payment on your credit card. But it pays to clear your balance in full each month to avoid paying interest on your card account.