Banks Back Down On Rip-Off Fines!

In a (somewhat mixed) victory for the Office of Fair Trading (OFT), the UK's biggest credit-card issuers have agreed to cut the rip-off fines which they levy on their cardholders.

Currently, if you miss a payment, pay late or exceed your card's credit limit, you can be expect to be hit by a penalty of around £20 to £25 per offence. For some borrowers who are struggling with excessive debts, this means racking up hundreds of pounds a year in fines. The OFT believes that a charge of around £12 per slip-up is reasonable, and would reduce the £300 million-a-year excess profit which banks make from these fines.

However, after being threatened with legal action by the OFT, the banks have backed down. Although they don't agree with the OFT's argument that these punitive charges breach consumer-protection legislation, several have agreed to halve their penalties over the next couple of months.

Now for the bad news: the banks have insisted that they will not cut other penalty charges, for example, on unauthorised overdrafts. What's more, several have promised to increase charges elsewhere in order to make up for the lost profits from reduced fines, putting consumers right back to square one!

Here is a round-up of each bank's undertaking:

Barclaycard (the UK's most popular credit card, with eleven million cardholders) -- penalty cut to £12 from £20 with effect from 1 August.

However, it will hike the interest rate charged on all cash advances to a whopping 27.9% APR, plus around one in ten customers will see their annual interest rate charged on purchases rise by between 2% and 5%. Hence, Barclaycard customers should watch their statements closely for news of upcoming rate hikes!

Egg and HBOS have agreed to cut their fines, but we have no further details as yet.

HSBC will cut charges to £12 from the end of this month, as will Lloyds TSB.

Nationwide BS -- the UK's largest building society will reveal its plans to the OFT later this month.

Royal Bank of Scotland is reviewing its fees, but doesn't plan to go as low as £12.

So, what the OFT giveth, the banks taketh away. The UK's five biggest banks made a record combined pre-tax profit of £33.5 billion last year, which they are determined to protect. Accordingly, if the OFT forces them to cut banking penalty fines, they have threatened to reintroduce charges for current accounts, putting an end to free banking. Boo, hiss!

This is yet another example of what is called the "bubble under the lino" effect: pressure to reduce charges in one area causes them to "pop up" (increase) elsewhere. Still, there are three actions which cardholders can take to hit bank at greedy banks:

1. Pay on time: set up a standing order or Direct Debit for at least your minimum monthly repayment or, better still, a fixed monthly amount or your entire balance. Also, keep an eye on your current account to make sure that the money is there on the day when your card payment leaves -- otherwise you'll be fined anyway!

2. Vote with your feet: with over 1,500 differently branded credit cards on offer, the world is up for grabs to anyone with a half-decent credit rating. If you're not happy with the rates and service which you receive, jump ship by moving to a Best Buy card which suits your needs.

For example, you could avoid interest on your debts for up to a year with a 0% on balance transfers card, or enjoy interest-free spending for up to twelve months with a 0% on purchases card.

3. Become part-owner of a bank: as I explained here, I'd much rather be a shareholder in a bank* than one of its customers. Banks are hugely profitable businesses, and the bulk of their returns are paid to shareholders in the form of twice-yearly dividends (income). Also, as financially strong firms, their share prices tend to rise over time, providing their shareholders with even greater gains.

In summary, today's announcement is good news for some customers and bad news for others. Hence, I'd urge you to keep your eyes peeled for any changes to your card's terms and conditions, and to act accordingly!

More: Compare credit cards and compare current accounts today!

* Cliff owns shares in HBOS and Lloyds TSB.