Credit card interest charges increase with reduced fees

September 19, 2006

By Peter Kenny

The excitement back in May of this year, when the Office of Fair Trading (OFT), encouraged banks and credit card companies to reduce the default penalty charges to a maximum of £12, was hard to miss.

Many people were delighted that the banks and credit card companies had been given a rap on the knuckles and told to reduce their fees or else!

Of course the penalty charges imposed by banks and credit card companies were extortionate. With most default fees at around £25 per item and incredibly some reaching £39 the banks and credit card companies actions bordered on legalised theft.

At the time we warned of what options were available to banks and credit companies to recover the lost £300 million of “revenue”. Back in June our article Lower Credit Card Fees - What Next For Banks? detailed some of the steps that we expected many banks to take.

Sadly our forecast seems to have come true.

Over the past six months we have seen banks and credit card companies slowly but surely increase fees for balance transfers, cash advances and purchase rates.

Balance transfer fees have risen to an extent that in many cases the point of the balance transfer is useless. Some companies have increased their balance transfer fee to 3 per cent and at the same time taken off their fee cap. Now the average balance transfer is currently around £3000, which could mean a fee of  £90. This size of fee is completely unnecessary and is one of the methods used to replace the default fee lost revenue.

Cash advances are a particular bugbear for us. We are forever advising people to stay clear of cash advances, plan ahead and you will not require to use this particularly over charged service. We are, however, well aware that many people are caught short and sometimes in an emergency rely on using their credit card for a cash advance. What is most upsetting that a service that attracts only emergency use is penalised so heavily. At the time of the OFT decision Barclaycard announced that were increasing their cash advance rate to 27.9 per cent, an increase of 6%. Many other banks and credit card companies have now followed suit.

Purchase rates have risen slightly but not as much or as obviously as balance transfer fees and cash advance rates. The reason for this is that the purchase rate must be displayed clearly and boldly in any advertising. Having a higher purchase rate could deter credit card applications. Banks and credit card companies prefer to apply stealth charges.