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
Saturday 22 July 2006
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.
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