Higher rates and annual fees on the cards

A new report from financial services research firm Defaqto suggests credit card companies may seek to charge customers £1bn a year in higher interest rates and annual fees to make up for revenue lost after a series of rulings from consumer watchdogs.

The Office of Fair Trading forced firms to reduce their credit card penalty charges for late payment to a maximum of £12 pounds in September. Firms are also facing regulatory action charges paid by retailers on card transactions and expensive payment protection insurance.

According to Defaqto, card holders who persistently pay late or go over their credit limit are facing hikes in interest, as card companies react to measures imposed by regulatory bodies. They also believe annual fees for credit cards are likely to be introduced.

David Black, report author and head of banking at the Defaqto, said the UK was likely to follow the US lead, where it is "fairly common" for credit card providers to charge more interest to customers who default. "Some providers will impose a rate increase after one default while others delay such an imposition until the customer's defaults become more chronic," he said.

People who repay their balance in full every month are unlikely to escape unscathed and could be charged annual fees. “Annual fees will more likely be introduced for people who pay off their balance every month rather than for those who carry debts. Those who have debts on their cards are more easily targeted by an increase in interest rates.” The report reveals that Co-Operative Bank has already introduced a £2 a month charge for its Platinum Base Rate Tracker card. Lloyds TSB recently launched its Premier Amex card, which gives a range of benefits in return for a £4.95 monthly fee.

Furthermore, the majority of card companies have recently introduced fees for transferring a balance.

Defaqto expects some providers to withdraw from the market over the next few years and cites Cahoot’s credit card, which was closed to new customers at the end of September, as an example of this.

The report by Defaqto follows similar findings from analysts PricewaterhouseCoopers who suggest card companies have seen a steep fall in profit margins as a result of scrutiny from the Office of Fair Trading, the Competition Commission and the Financial Services Authority, and consumers should be warned that the costs would be passed back.

Richard Thompson, the author of the PricewaterhouseCoopers report, said: "With fierce competition and rising bad debts already hitting issuers, it's hard to see how the banks will absorb £1bn of lost revenues. We are likely to see a 'waterbed effect', whereby charges pushed down in one area pop up somewhere else.

"To put it in perspective, card issuers would have to levy annual fees costing the average credit card user £35 a year to recoup the potential £1bn loss. If lenders tried to recoup this through interest rates alone, we would see APRs increase by two percentage points on average," he said.