Banks to Reduce Credit Card Charges

Credit cardholders in the UK received some good news when three of the UK’s largest banks announced that they are to cut their credit card penalty charges. The announcement comes after credit card issuers were told by the OFT (the Office of Fair Trading) to reduce the level of penalty charges, as they were unfair and unjustified.

However, one of the big three, Barclays, is set to increase its interest rate for some cardholders. Financial experts had warned that banks might increase interest rates on their credit cards to offset any losses incurred through reducing penalty charges.

Over the next two months Barclay, Lloyds TSB and HSBC will cut their penalty charges by nearly half from £20 to £12.

The cut in charges was brought about when in April the OFT demanded that credit card issuers cut penalty charges, as they were excessive. The OFT went on to say that the charges resulted in credit card customers being illegally overcharged to the tune of £300m a year through these excessive charges.

The charges in question are levied by issuers when cardholders fail to make payments, make late payments or spend more than their authorised limit.

Despite protestations from the banking industry, the OFT demanded a response from banks by May 31. The OFT threatened legal action if banks failed to comply with the demand, as the body does not actually have the power to implement its order directly.

Further to the demand for a cut in credit card penalty charges, the regulator also suggested that banks should also look into reducing charges for overdrafts.

One of the card issuers who have decided to comply with the OFT’s order, Barclaycard, have admitted that some of its 11m UK customers face the prospect of paying higher interest rates.

August 1 st, when the new lower penalty charges are implemented, will the interest rate that 10% of its customers currently pay, rise by between 2% and 5%. This raise will affect interest rates in the range of 14.9% to 29.9%.

The bank stated that its most credit worthy customers will enjoy the lowest rate of 14.9%

A spokesman for the bank said: “ We have to reflect in our pricing the costs we incur in our business.”

Alisdair Milton
1st June 2006