£180bn credit card industry accused over hidden costs

They entice customers with racy products in a range of exciting colours. But when things go wrong, their shiny offerings can turn out to be financial nightmares riddled with hidden costs and useless extras.

They entice customers with racy products in a range of exciting colours. But when things go wrong, their shiny offerings can turn out to be financial nightmares riddled with hidden costs and useless extras.

It may sound like the offering of a dodgy car salesman but according to consumer campaigners, this is the risk run by anyone who dabbles in Britain's £180bn credit card and personal loan industry.

A report by Which? magazine published today accuses banks and loan companies of using dubious sales practices and excessively high charges to boost their profits from Britain's 50 million credit card holders and loan holders.

The organisation highlights what it claims is a series of unacceptable practices - from high penalty charges for late payments to hard-selling insurance policies - which mean consumers are being exploited regardless of whether their plastic is gold, platinum or carries a novel design.

Which? is calling for measures to force the industry to end tactics such as unsolicited credit limit increases to end a boom in debt problems.

Malcolm Coles, the editor of the magazine, said: "The credit industry has an alarming number of tricks up its sleeve to wring every last penny it can out of its customers. "Lenders seem to have no qualm about persuading people to take on more debt than they can afford and they'll carry on doing it as long as they can get away with it.

Plastic cards - both debit and credit - last week overtook cash as the nation's favourite form of payment. Personal debt now stands at £1trn in Britain, of which £180 bn is held on credit cards and personal loans.

The Citizens' Advice Bureau has reported a 74 per cent increase in the past seven years in people seeking its help with debt problems. The Which? study, which said it accepted customers found credit cards "convenient and popular", accused companies of finding ingenious ways of boosting their profits in a competitive environment.

It cites the charge of £20 to £25 made by most companies when a customer fails to make a payment or goes over their credit limit. A survey found one in four credit-card users received such a charge at least once last year, netting the industry an estimated £427m a year.

The report claims that the charges are excessive because letters informing customers of the penalty are generated automatically and the charge is added to the next month's bill.

It also criticises the selling of payment protection insurance (PPI) with personal loans, which is designed to meet monthly payments if the debtor can no longer work. Describing such policies as "expensive", offering limited cover and potentially "useless" for the self-employed, Which? found they were also not sold properly and represented poor value for money.

Researchers found that PPI was often included automatically on loan quotes and many companies failed to state that the non-compulsory insurance was included. Adding PPI to a £5,000 loan from one high street bank was found to cost £1,020 - almost as much as the interest charged on the loan itself.

The result, according to Which?, is that loan companies make an estimated £1bn a year in commission on the PPI policies. The report lists a catalogue of "sneaky tricks" which it claims are used by the credit industry to boost profit margins at when interest rates are low.

But the body representing credit card operators said the report was out of date and failed to explain the basis for some of its claims. The Association for Payment Clearing Services rejected the figure of £427m made from late payment fees, saying that the £20 to £25 charge reflected real administration costs from which companies were banned from making a profit.

A spokeswoman said: "This report makes no recognition of the development of summary boxes which set out upfront the costs of each card upfront."