Penalty charges for refusing to rack up credit card debt

Credit card and store card providers are increasingly charging ‘inactivity fees' as part of a range of measures designed to soften the blow of new regulations that will give customers a fairer deal.  The regulations, which take effect from the 1st February, force providers to ensure that customers pay off their most expensive debts first, and will cost the providers up to £300m per year in interest and charges as a result.

According to personal finance website money.co.uk, more and more providers have started to adopt inactivity fees, with Santander, American Express and a range of store cards including Debenhams, House of Fraser and Laura Ashley cards all charging between £10 and £20.  Typically, the charges are levied if no purchases are made over a 6-21 month period.

Whilst the individual charges are relatively modest, research from money.co.uk found that up to 12m people (24%) are planning to cut their debts during 2011.  If 50% of those people succeed, inactivity payments to credit card and store card providers could reach £12m.

Tips:  How to avoid the new charges

1.  Check your terms and conditions:  Contact your provider to find out whether ‘inactivity' or ‘dormancy' fees can be applied to your card, how much they are and how ‘inactivity' is defined.

2.  Play the system:  Based on your provider's terms and conditions, work out whether you can avoid them without incurring additional interest.   For instance, making occasional purchases and then paying them off within a month to avoid paying interest will work in some cases.

3.  Cancel your card:  First of all, you may want to consider cancelling credit cards you no longer use to avoid any chance of incurring this type of charge, which has the added benefit of improving your credit score.  If you decide to cancel, you must contact your provider to ensure the account has been formally closed.

4. Move to another provider:  If cancelling is not an option for you, for instance because you need access to a credit card, moving to a provider that does not charge for inactivity is another option.  If you decide to go down this route, it is obviously very important to check out the alternatives thoroughly - read the terms and conditions to make sure you understand how interests and fees are charged, and make sure the card is right for you before proceeding.

For more information, read this free guide from money.co.uk:
money.co.uk/article/1006343-are-you-being-charged-for-not-using-your-credit-card.htm