Return of annual fees is on the cards

Annual fees on credit cards are set to become the “norm” by the end of this decade as providers seek to rebuild profits, leading financial research company Defaqto predicts.

But providers risk “significant contraction” in the UK credit card market as customers stung by annual fees switch to debit cards instead.

Defaqto’s Head of Banking David Black believes more providers will follow the lead of Lloyds TSB and Barclaycard. The latter is considering introducing an annual fee of up to £20 for customers who do not use their card regularly. Those who do not spend enough on the card or who have not used it for a year are likely to be affected.

Inactive credit cards can add to the costs of providers and these costs will be passed on somewhere, in some instances to those who do use the cards.

“Reports that Barclaycard is considering an annual fee is not a surprise and my expectation in the years ahead is that there will be a gradual move towards annual fees in the credit card market.

“However this will herald a significant contraction in market size as people who clear their outstanding credit card balances on a monthly basis will, as they start facing annual fees jettison credit cards in favour of using debit cards instead,” he said.

The Office of Fair Trading’s ruling in August last year to limit penalty fees charged by credit card providers to £12 has hit profits and prompted many to look to hit back by raising interest rates and imposing new charges and fees, Defaqto says.

Card firms have also closed long term inactive accounts – Barclaycard, for instance, shut 1.5 million accounts in 2006. However consumers can still beat the card firms by switching to more competitive products as companies focus on winning new business.

“The credit card market still encourages disloyalty by routinely restricting best offers – such as 0% introductory balance transfer offers - to new customers and, for this reason, it is still possible for consumers to ‘play the market’ and take advantage of what’s available by reviewing and switching their credit card provider on a regular basis.

“This is the case whether they are seeking to transfer existing balances or to take advantage of cashback reward schemes. In many cases it can be advantageous to use different cards for different purposes. By closing unused credit card accounts the consumer will often be able to return to the same provider at a later date to take advantage of offers restricted to new customers,” David Black said.