Credit card white paper fails to tackle £900m of charges

Following the Government's spotlight on money making practices in the credit card industry, uSwitch.com's credit card review highlights three additional practices that need to be addressed. In total, they will cost consumers a whopping £864 million over the next 12 months alone. These practices include; fees and charges for credit card cash withdrawals, balance transfers fees and overseas transaction charges. Unfortunately, none of these lucrative issues have been included in the white paper, costing each credit card customer an average of almost £29 each a year.

The white paper so far...

The Government has made a great start by kicking off the industry review with the investigation of five practices. These include the ban of unsolicited credit card cheques and an investigation into four key areas including order of repayments, minimum repayments, increasing fees and charges, and increasing credit limits without the customer's permission. However, looking at isolated issues within the industry leaves potential scope for providers to adopt ‘robbing Peter to pay Paul' tactics to recoup any lost revenue.

Cash withdrawal fees

uSwitch.com calculations reveal that 7.3 million consumers currently make over 38 million cash withdrawals using a credit card every year. With major providers charging up to 32% APR for this feature - almost double the average purchase APR (17.69%) - this is a very lucrative ‘cash cow'.

The interest rate applied to withdrawals has rocketed by 41% over the past three years from 21.22% APR in 2005 to almost 30% APR. In monetary terms, providers could be raking in up to a staggering £161 million in interest for this service. By hiking rates by more than a third, providers have inflated this income by up to £43 million since 2005.

To put this into context, our research has shown that last year, each individual has made a total of 5.2 credit card cash withdrawals in both the UK and overseas totalling £500. This actually costs consumers £22.07 each in the average billing period (56 days). Three years ago, the same level of spending would cost just £16.12 in interest over the same period.

The biggest issue with this practice is that almost one in three people (69%) who make cash withdrawals do not know how much it costs and 12% believe it's no different to a debit card withdrawal. This could explain why over one million people have resorted to using cash withdrawn on a credit card to pay off other debts such as mortgage, loan or household bill. Most alarmingly, over 700,000 actually use it to pay off another credit card bill.

Balance transfer fees

Since their introduction five years ago, balance transfer fees have provided the means for providers to attempt to recover the £600 million in lost revenue caused by 0% introductory deals around seven years ago. These fees serve to penalise savvy consumers who regularly switch to the next best balance transfer deal.

The average balance transfer fee is currently 2.93%, totalling £54.09 on the average balance transfer of £1,846. With 7.8 million balance transfers carried out each year, the industry is currently making almost £422 million from this fee alone. In just 12 months this income has increased by almost £35 million as the average balance transfer fee has jumped by just 0.24%.

Overseas transactions

Using a credit card overseas is a costly exercise and costs a total of £281 million each year for consumers buying goods and services. These charges include a 2.75% exchange rate loading fee for every transaction and a dynamic currency conversion charge of around 4% if the retailer converts the transaction to sterling instead of the local currency. In effect, every £500 spent will cost the consumer up to an additional £15 in fees and charges. With 142 million credit card transactions carried out overseas each year, this is a huge problem for consumers.

Louise Bond, personal finance expert at uSwitch.com comments: "Whilst the Government's white paper is a great start, it is disappointing that these issues have been overlooked. Balance transfer fees are a necessary evil to secure the next best balance transfer deal but charging consumers £55 every time a consumer moves cards seems slightly excessive. Cash withdrawal fees are also a huge issue for consumers, particularly when they travel abroad. This is quite a big oversight and it will only serve to leave the credit card industry with a ‘rob Peter to pay Paul' opportunity if they do actually lose money on the other issues highlighted.

"There are still some great credit card deals around so consumers really should spend some time hunting down the next best deal. High fees and charges for specific practices do not impact every single credit card customer as they may not use every facility on offer. However, for those that are struggling financially, every provider has a different charge for every facility they offer so it's still worth finding the cheapest provider for your individual needs."