In the UK the 8 largest credit card providers have been ordered to reduce their charges, for default and late payment, by between 40 and 50%. The current late payment charge by most major issuers is between £20 – £25 ($30 – $40 US) and the have been instructed to slash that down to £12 -£15 UK ($18 – $20 US).
The UK Office of Fair trading, who have been investigating credit card charges for the last few months, stated “The OFT considers that, in a consumer contract, a default charge is likely to be disproportionately high if it is more than a genuine pre-estimate of the damages that the card issuer would win in court if it sued the cardholder for breach of contract,” adding “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.”
In the opinion of the OFT the current charges of between £20 and £25 excessive and possibly illegal and has given the card issuers 3 months to respond.
Whilst the current ruling is provisional it is expected that the final ruling will apply to all credit card issuers in the UK and, if necessary, the OFT will take a test case to the UK courts for a ruling forcing the banks to comply.
Once applied to credit cards the decision will also apply to overdrafts, store cards and mortgages.
Estimates on what this will cost the banks vary from 400 million to 1 billion UKP – up to 50% of the profits earned on credit cards. In recent results the big 5 banks in the UK declared record overall profits of £33 billion, so they can easily reduce these charges.
Matt Barrett, the former chief executive of Barclays, famously once told MPs that he didn’t use credit cards because they were “too expensive”. Whilst the ruling is intended to reduce costs to customers it’s likely that the banks will other find ways to keep the costs high.
It is already clear that lenders are not great fans of interest free balance transfers as most have applied a 2 – 3% administrative charge. Expect this trend to continue and possibly for the interest free transfers to disappear altogether.
Expect an increase in the number of cards carrying an annual fee and for the annual fee on current cards to increase. Further adjustments could include the disappearance of cashback and a reduction in free services, travel insurance, flights, holidays and other promotions.
Though this ruling applies to the UK only, once it is enforced card issuers around the World will be under pressure to follow and countries with strong consumer protection legislation may follow the OFT’s lead.
This is therefore an ideal time to review your current credit cards and take advantage of offers while they last.
If you have a credit card debt, which is rolled over each month, take advantage now of the interest free offers currently available. Read the small print, some carry a 2-3% charge, avoid these as there are still a few interest free transfer offers which do not have the administration charge.
If you repay your cards in full each month take a look at the cards offering cashback and get a discount on your purchases while it still exists.
If you have a balance which will take years rather than months to repay look at the permanent low interest cards or even better look at debt consolidation and move the debt to a low interest loan or mortgage.
Credit cards are an expensive form of long term borrowing. This ruling, whilst welcome, may herald the start of a restructuring of credit cards and where they will end is very uncertain.