The many ups and meagre downs of banking charges

Default fees are being reduced - thanks to a critical Office of Fair Trading - but at what price, asks Paul Gosling

That banks lose on swings, they more than make up for by higher charges on roundabouts. This, at least, is the impression emerging since the Office of Fair Trading (OFT) announced it was forcing credit card issuers to reduce their "default charges" - the penalties imposed for missing monthly repayments, going over the credit limit or having a payment cheque bounce.

In April, the OFT announced that default charges above £12 would be regarded as unfair, unless there are exceptional circumstances. Card issuers have until the beginning of September to adopt lower charges - which most have initiated.

The OFT, strongly critical of the size of these charges - some as much as £25 for sending in a payment a couple of days late - concludes: "We consider that a contract term is likely to be unfair if it requires consumers to pay more as a result of a default than the court would order them to pay if they were sued for breach of contract."

Eight major card issuers were warned to reduce their default fees, with the rest of the industry expected to fall in line. However, in moves that the card issuers mostly say are "completely coincidental" - as Lloyds TSB put it - they are increasing a raft of other charges. Balance transfer fees are a prime example, with Lloyds TSB, Halifax, Bank of Scotland, HSBC, Egg, Virgin and MBNA increasing these. But charge increases were already "planned for" says HSBC. In the case of Barclaycard, its increase came in last year.

Some card issuers, such as Virgin Money, also took the opportunity to remove the cap on balance transfer fees. MBNA raised its cap from £50 to £75.

"We would expect banks to make up these [lost] charges in one way or another," says Cristina Rebollo, spokeswoman for uSwitch.com, which monitors the market. She describes the Halifax balance transfer rise from 2 per cent to 3 per cent as "massive". "It's worrying, because the number of people paying default charges is much lower than those doing balance transfers," she says.

Since the introduction of chip and PIN, there has been a substantial increase in the use of credit cards for cash withdrawals - despite the high interest rates associated with the transactions. And on some cards, the interest rates charged have risen even higher.

Barclaycard increased its cash interest rates from 21.9 per cent to 27.9 per cent - explicitly linking the increase to the OFT move on default charges. First Direct lifted its cash rate from 17.9 per cent to 20.1 per cent. And Virgin Money's cash interest rate rose from 20.9 per cent to 24.9 per cent. USwitch predicts that more card issuers will lift their APRs as they make up their lost default charges.

But perhaps the most insidious - and for some customers the most expensive - change is the way repayments are treated after balance transfers. Lisa Taylor, of Moneyfacts, says: "HSBC had one of the three cheapest credit cards, with repayments going to pay the most expensive debt first. Now it is being changed to paying off the least expensive debt first." But HSBC claims that the "payment allocation change" - as the bank calls it - was planned prior to the OFT announcement.

But there is some good news in the card market. Halifax has cut the typical APR on its Visa card from 15.9 per cent to 9.9 per cent. And the 0 per cent offer on initial purchases has increased from three to nine months. But these benefits are mitigated by the 50 per cent increase in balance transfer fees and a reduction in the 0 per cent period on balance transfers from a year to nine months.

Virgin Money has also increased its 0 per cent periods for balance transfers and initial purchases.

Also, the OFT's view that these charges have been excessive opens the way for customers to instigate legal proceedings against their banks to recover earlier penalty charges. There are suggestions that the banks are so keen to avoid these cases going to court that they are now making generous settlement offers.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
Russell Brand was in typically combative form during his promotional interview with Newsnight's Evan Davis
peopleReports that Brand could stand for Mayor on an 'anti-politics' ticket
News
The clocks go forward an hour at 1am on Sunday 30 March
news
Arts and Entertainment
The Doctor finds himself in a forest version of London in Doctor Who episode 'In the Forest of the Night'
TVReview: Is the Doctor ever going stop frowning? Apparently not.
News
Voluminous silk drawers were worn by Queen Victoria
newsThe silk underwear is part of a growing trade in celebrity smalls
PROMOTED VIDEO
Sport
footballMatch report: Real fight back to ruin Argentinian's debut
News
Candidates with surnames that start with an A have an electoral advantage
newsVoters are biased towards names with letters near start of alphabet
Arts and Entertainment
Isis with Lord Grantham (Hugh Bonneville)
TV
Arts and Entertainment
Jay James
TVReview: Performances were stale and cheesier than a chunk of Blue Stilton left out for a month
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Compensation and Benefits Manager - Brentwood - Circa £60,000

    £60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

    Data Analyst/Planning and Performance – Surrey – Up to £35k

    £30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...

    IT Systems Business Analyst - Watford - £28k + bonus + benefits

    £24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

    Markit EDM (CADIS) Developer

    £50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

    Day In a Page

    Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

    Wilko Johnson, now the bad news

    Former Dr Feelgood splits with manager after police investigate assault claims
    Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

    Mark Udall: The Democrat Senator with a fight on his hands

    The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
    New discoveries show more contact between far-flung prehistoric humans than had been thought

    New discoveries show more contact between far-flung prehistoric humans than had been thought

    Evidence found of contact between Easter Islanders and South America
    Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

    Cerys Matthews on Dylan Thomas

    The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
    DIY is not fun and we've finally realised this as a nation

    Homebase closures: 'DIY is not fun'

    Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
    The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

    Air New Zealand's wizard in-flight video

    The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
    Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

    Pumpkin spice is the flavour of the month

    The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
    11 best sonic skincare brushes

    11 best sonic skincare brushes

    Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
    Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

    Paul Scholes column

    I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
    Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

    Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

    While other sports are stalked by corruption, we are an easy target for the critics
    Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

    Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

    Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

    A crime that reveals London's dark heart

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?