Credit card companies invent new fees to replace lost charges

Leading credit-card providers have invented new fees and charges to compensate themselves for the loss of income caused by a regulatory crackdown on penalties last year, a report published yesterday said.

Defaqto, the personal finance analyst, accused lenders of recouping the lost income through a series of interest-rate hikes and new charges, and warned borrowers to expect the cost of credit to rise significantly.

Last year, the Office of Fair Trading ruled that credit-card providers could no longer charge penalty fees for late payments or exceeding credit limits by £25 or more, because they could only legally recoup their costs in such cases, rather than making a profit. Since then, most such charges have been reduced to below £12, the level which is widely regarded as representing a legally defensible level of penalty fee.

"Credit-card providers have lost a great deal of highly profitable revenue because of the charges cap and will inevitably seek ways to replace their lost income," said David Black, Defaqto's principal banking consultant. "This is even more imperative for the largest institutions because of the pressure arising from the knock-on effects of the sub-prime lending crisis."

Mr Black said lenders had already introduced new charges – for low usage, for example, or for failing to notify lenders of a change of address – as well as significantly increasing existing fees. The average fee imposed when customers transfer a balance from one credit card to another has risen by almost two-thirds since June 2006, for example, from 1.64 per cent to 2.57 per cent. Lenders have also raised fees for cash advances by more than a fifth over the period, from an average of £2.25 18 months ago to £2.76 today.

While the Bank of England has raised base rates from 4.5 to 5.75 per cent over the same period, the rates charged by credit card lenders have risen substantially more quickly. The monthly cost of borrowing on plastic is almost 7 per cent higher today than it was in June last year.

Samantha Owens, the head of personal finance at the analyst Moneyfacts, said the rising cost of credit cards also reflected increasing nervousness among lenders about the state of the credit market.

In addition to raising interest rates, many credit-card companies are now rejecting greater numbers of applications for their plastic, while in the unsecured loan market, several providers have withdrawn altogether. LV=, the loan provider run by Liverpool Victoria, pulled out of the market yesterday, while lenders such as Leeds Building Society and GE Money have also withdrawn their deals.

"Rates have been rising gradually for some months, with competition putting increased pressures on margins and bad debts on the increase," Ms Owens said. "But the credit crunch seems to be the final nail in the coffin, as lenders continue to raise rates but more surprisingly withdraw their products all together."