OFT demands cuts in credit card charges

Credit card companies were ordered yesterday to cut the "excessive" charges they impose on customers who fail to pay their bills on time.

The Office of Fair Trading has written to the UK's eight major credit card issuers - Barclaycard, Royal Bank of Scotland/NatWest, HSBC, Lloyds TSB, HBOS, Egg, Capital One and MBNA - about its concerns. The regulator has given them three months to respond to its finding that default charges of typically £20 to £25 are excessive and unfair. The charges are levied when a monthly credit card repayment is not made on time or a borrower goes over his credit limit, or if a cheque bounces.

"The OFT believes that it is unfair ... to require a consumer who defaults in one of these ways to pay a disproportionately high charge," it said. "The OFT's provisional view is that the levels of the default charges imposed by the credit card companies need to be reduced in order to be fair."

The companies face the threat of legal action if they fail to reduce their penalty charges. A spokeswoman for the OFT said: "If they give us fruitful undertakings, the matter will be resolved. If the undertakings aren't forthcoming, we can take them to court." She added that the credit card firms had been "co-operative".

The OFT said the charges should be linked to what a court would award if a credit card firm sued one of its card holders for breach of contract.

Credit card providers are believed to make millions of pounds each year from the charges. They have been criticised for sneaking in higher penalty charges to boost their profits at a time when fierce competition is forcing them to reduce their headline interest rates. Several of the credit card firms defended the charges as "fair".

A spokesman for Barclaycard, Britain's biggest credit card provider, said it had no plans to cut its £20 penalty charges, but added: "We'll work with the OFT to address the concern that they've outlined in their letter to us. But nobody has to pay the fees if they make the minimum payment on time."

RBS said more than 96 per cent of its customers did not pay default charges. "We believe it is right to have a process in place for managing late and outstanding payments and there is a cost associated with this," it said.

The consumer watchdog Which? welcomed the OFT's announcement. It said its research had shown "the charges don't reflect the costs the banks incur".