Office of Fair Trading tells card companies to cut "excessive" penalty charges

The government consumer watchdog, the Office of Fair Trading (OFT) has sent letters to eight major credit card companies - Barclaycard, Egg, HSBC, HBOS, Lloyds TSB, MBNA and Royal Bank of Scotland - telling them the penalty charges they impose for late payments are excessive.

The OFT has told the card companies they have three months to cut "excessive" default charges or face action in the courts.

At present a charge of around £20 to £25 is payable if a cardholder fails to pay his credit card bill on the due date, exceeds his credit limit, or pays on time but by a direct debit or cheque that is not honoured.

The OFT believes the charges breach regulations covering unfair terms in consumer contracts and the default penalty charges levied by the credit card companies need to be reduced in order to be fair.

The OFT believes the current charges are disproportionate to the loss that failure to pay causes the bank. The OFT's view is charges should reflect actual costs to banks caused by late payment, normally this would just be the postage, stationery and a small amount of staff time involved in the sending of a standard letter.

In response, card companies have stated they disagree with the findings and consider their default charges to be fair. For instance MBNA Europe Bank insisted that its charges were "fair and transparent".

Barclaycard has said it will cooperate fully with the OFT investigation, but had no plans to lower its charges of £20 for late payments or cardholders exceeding credit limits.

The OFT has said if its concerns are not addressed in the next three months, it may take legal action against the card providers.