OFT Late Payment Fine Crack Down May Hurt Consumers!

MSE_Martin

The OFT has today announced a crackdown on late payment fines on credit cards.... sounds good but perhaps isn't all its cracked up to be!

My View

"Credit Card Companies are businesses, their job is to make money from customers. If the £25 late fee disappears they'll make money elsewhere. Already a much bigger fine for many customers is the fact that if you pay late you lose your interest free deal. This costs most people a lot more than £25. MBNA does this in most cases, and Barclaycard has a 'two strikes and you're out policy."

While the current penalties are of course unfair, getting rid of them runs the risk of more companies adopting the above policy, which it would be much more difficult to argue is 'unfair'. Plus users who are always currently within the limits may foot the bill for the loss of the revenue stream, subsidising those who pay late."

Best advice is treat all card companies as the enemy, and set up a Direct Debit to pay at least the minimum payments each month. Then if you want to (and you should) pay more you can simply call up or send in a cheque. This way you're sure not to be fined."


THE OFT'S PRESS RELEASE

OFT consults with eight credit card companies on the level of their default charges26 July 2005: The OFT has written to eight major credit card companies to consult on its provisional conclusion that the levels of default charges they impose (e.g. for late payments) are excessive. A charge currently 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 that it is unfair for the purposes of contract terms regulation to require a consumer who defaults in one of these ways to pay a disproportionately high charge.

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. The law restricts the damages that can be awarded to compensate for loss suffered as a result of a breach of contract. The breach must be an effective cause of the loss. The innocent party is entitled to be compensated for certain types of loss that were reasonably foreseeable at the time that the contract was made, but is not entitled to more. The OFT believes that a default charge calculated in accordance with these principles would be likely to be fair under the contract terms regulations. 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.
The credit card companies have cooperated with the OFT's investigation into default charges. They have stated that they consider their default charge provisions are fair. The OFT has now explained to them why it does not accept their view and has given them three months in which to provide suitable undertakings or otherwise to address the concerns it has raised. The OFT has powers to take enforcement action in the courts if necessary to protect consumers.

Credit is one of the OFT's five priority sectors.





To discuss this click reply

Rafter

Think you are right Martin. I'm not sure this is in consumers interests either.

If banks cant charge as much in fees they will charge more in interest to compensate or reduce their offers.

Both type of moneysavers lose, those who like the offers, and those trying to get out of debt faster.

Not sure this is a great move by the OFT. Better to tackle APR calculations, APR rates etc than fees that can easily be avoided by setting up a direct debit and managing your finances properly.

R.

daveboy

I think it's time for activation of something in the Ts & Cs when someone makes more than 2 late payments in 12 months.

If companies called the debt in, I'm sure suddenly those disorganised people would suddenly become organised.

Now you can watch those 0% deals sail away into the sunset. My money is on Barclaycard raising its rates in the next few months too.

dag_2

I'm of mixed opinion on this one. Correct me if I'm wrong, but credit card companies have never been able to enforce these late payment fines through the courts. Except in cases where they've won by default, because the debtor hasn't done anything to challenge them at all.

However - many people cough up because they think it's easier and simpler - and they get the money by borrowing elsewhere. I don't think that should be allowed, personally.

But I'm all in favour of clearer and fairer interest charging too.

Milarky

What about bank charges and current accounts? These are far more important surely -given that current account coverage is wider [and more essential] than the carrying of credit cards. People need their bank accounts and can rarely avoid altogether the need to use their overdraft facilities from time to time. Does the OFT not therefore have any interest in the operation charges on millions of current accounts - or does that come under the financial industry's flexible friend [aka FSA]?

dell_2

you could have acknowledged Rafters post............

(sos not bright enough to do the link thing!)

Walletwatch

MSE_Martin wrote:

The OFT has today announced a crackdown on late payment fines on credit cards.... sounds good but perhaps isn't all its cracked up to be!

My View

"Credit Card Companies are businesses, their job is to make money from customers. If the £25 late fee disappears they'll make money elsewhere. Already a much bigger fine for many customers is the fact that if you pay late you lose your interest free deal. This costs most people a lot more than £25. MBNA does this in most cases, and Barclaycard has a 'two strikes and you're out policy."

While the current penalties are of course unfair, getting rid of them runs the risk of more companies adopting the above policy, which it would be much more difficult to argue is 'unfair'. Plus users who are always currently within the limits may foot the bill for the loss of the revenue stream, subsidising those who pay late."

To discuss this click reply

I agree, Martin. As you rightly put it, there is no denying the fact that these charges are excessively high, but instead of contesting these charges, and directing people to websites showing ways in which these charges can be challenged, the better option is to ensure that you are not caught violating the T&Cs you signed up to, so that you never have to incur these charges.

I would extend your argument to some posts I've read recently on some posters wanting to take banks to court for levying charges on accounts - if quite a few of these cases were to go against banks and set precedents, we can invariably expect a backlash, either in the form of lower interest rates, or worst case, an end to the free banking that we enjoy today. This would potentially culminate in an end to money saving opportunities, or simply increase costs associated with maintaining an account with banks.

Finally, if I am trying to take advantage of the T&Cs I sign up to and make or save some dough, I don't see it as right to be turning at the banks and questioning those very T&Cs to try and contest a charge they apply. After all, it only takes some financial discipline to conduct your banking affairs in such a way that you never need to pay these charges ever.

Milarky

The point was, surely, that the OFT - responsible for credit regulation - doesn't think that banks [in their credit card issuing capacity only] should be charging £25 etc for a minumum payment of £5 [say] arriving one day late. This is not about banks' right to charge interest - which is something we would all of us accept - but rather the use of automatic charging irrepsective of any finincial 'loss' suffered.

Now my point was that banks have developed a not dissimilar range of charges for current account which - if anything - put the operation of CCs accounts into a 'good light' by comparison. [Eg Lloyds charging £30 a day for 3 days in a month for going £10 outside your agreed averdraft if memory servces]

The principle raised by the OFT applies far more starkly with these current accounts, and the public is arguably even more in need of adequate protection from banks levying such charges as from the CC industry - as effectively the 'secondary' bank sector. The only reason I could think that the OFT item does not mention current account charging practices is these are not its responsbility.

The FSA, as anyone who has remotely heard of them - never mind actually had dealings with them - is basically an industry creature that does nothing to prevent unfair practices because it does not want to 'offend' the industry that funds it. By contrast the OFT can tell those same companies where to go...

And I therefore disagree with Martin [well, someone has to!] in that giving CC cards some discipline to work within by reducing their discretion the OFT will harm no one's position. It's a 'win-win' situation.

Nick_C_4

users who are always currently within the limits may foot the bill for the loss of the revenue stream, subsidising those who pay late

Isn't it more like: people who pay late are currently subsidising those who don't? The OFT's argument is that the penalty (e.g. £25) is disproportionate to the costs incurred, which surely can't be argued with, they don't even send letters anymore. That means the credit card provider makes money from people paying late, which means it's worth their while dropping money by giving free or cheap credit deals to get the money back in charges and interest. Those of us who stooze, or just pay their balance off in full, are benefiting because the ability of credit card providers to make money from those who don't pay on time etc.

While from a self-interested point of view, this is bad, as I could lose out, morally I agree with what the OFT is doing.

Marigold123

dag wrote:

I'm of mixed opinion on this one. Correct me if I'm wrong, but credit card companies have never been able to enforce these late payment fines through the courts. Except in cases where they've won by default, because the debtor hasn't done anything to challenge them at all.

However - many people cough up because they think it's easier and simpler - and they get the money by borrowing elsewhere. I don't think that should be allowed, personally.

But I'm all in favour of clearer and fairer interest charging too.

Don't they just wack it on the top of your outstanding amount, and then start charging interest on it? I'm not sure they bother with court.

InsuranceLiability

None of the card companies seem to be rushing to announce they are scrapping charges and changing their terms and conditions. Cant see anything happening until after the '3 month review period' after which the OFT will need to force the issue. Cant see exactly what they will do about it.