A Consuming Experience

This post is on the UK's Office of Fair Trading view that credit card companies' default charges for late payment are unfair, and what you as a consumer might be able to do if your credit card company charges you a whacking great fee just for being a bit late with your monthly payment.

What's all this about?

A couple days back, on 5 April 2006, the Office of Fair Trading told the credit card companies to reduce the default charges which they automatically sting credit card users for if you're late with any monthly payment.

As many of us know to our cost, the practice of the credit card issuers has been to automatically charge you an extra £25 on your next month's bill if they receive any of your monthly payments (no matter how little you owe them, say just £5) later than the due date - even if you're just one day late.

I got charged a late payment fee last year during a particularly busy period, when I simply forgot to get my bank to send a small amount through on time. It was less than a week late and I paid the lot in full, but they still charged me an extra £25 the next month, and when I rang them up about it, even though I'd always paid everything on time before, they just wouldn't discuss it.

Credit card default charges - unfair penalty?

The OFT's view is that credit card default charges have generally been set at a significantly higher level than is legally fair. They estimate that across the industry this has led to unlawful penalty charges currently in excess of £300 million a year! Nice if you own shares in a credit card company, not so nice if you're a credit card user.

The OFT have now set out what they believe is the law on this issue (Calculating fair default charges in credit card contracts, A statement of the OFT's position, April 2006). Basically, there is a consumer protection law in the UK, the Unfair Terms in Consumer Contracts Regulations, which says that most standard terms (like the right to impose default charges for late payments) in consumer contracts (such as credit card agreements) have to be fair. If a standard term is not fair, the consumer can't be held to it (more info).

The OFT believe that "default charge provisions are open to challenge on grounds of unfairness if they have the object of raising more in revenue than is reasonably expected to be necessary to recover certain limited administrative costs incurred by the credit card issuer. [Their paper] goes on to explain how we think the relevant legal principles apply in practice to credit card agreements. The statement is intended to provide guidance for financial institutions setting default charges…"

In other words, they think late payment fees ought just to cover the admin. costs of the issuer in dealing with the late payment - they shouldn't be used as a way for the credit card companies to boost their profits.

Not surprisingly, the OFT said that most of the 8 major UK credit card issuers don't agree with the OFT's view of the law! (I guess they would claim it really is fair to charge you £25 for being 1 day late on a £2 payment.) Only the courts can decide finally who is right and who is wrong. Still, the OFT now expects all credit card issuers to recalculate their default charges in line with the principles set out their paper, and to take "urgent action where needed to reduce the level of credit card default fees".

The credit card industry has until 31 May 2006 to respond to the OFT on that statement and on their willingness (or not!) to adjust their default charges. (The OFT have also said that these principles also apply to default charges in other consumer contracts such as those for bank overdrafts, store cards and mortgage.)

So what's a fair default charge?

The OFT think that a default charge should only be used to recover certain limited administrative costs. "We consider that a contract term is likely to be unfair if it requires consumers to pay more as a result of a default than the court would order them to pay if they were sued for breach of contract. This means that a default charge should not exceed a reasonable pre-estimate of the administrative costs that the consumer ought to have realised would be likely to be incurred by his or her card issuer in dealing with defaults."

These may include postage and stationery costs and staff costs and also a proportionate share of the costs of maintaining premises and IT systems necessary to deal with defaults ("A fair default charge should not exceed a reasonable estimate of certain limited administrative costs which the credit card issuer reasonably expects to incur as a result of default").

They've said that while the level of a fair fee will depend on the precise business circumstances, they're including a simple monetary threshold of £12 for OFT intervention on default charges. They'll presume that credit card default charges set above this level are unfair unless there are exceptional factors. Conversely, they don't propose at present to consider legal action where charges are set below £12.

Remember, enforcement action by the OFT for an unfair contract term is different from consumer action on the same thing - the OFT can only stop the company from using the unfair term further, but they can't do anything else. You have to sue to get the court to decide that the term is unfair and try to get some compensation for it e.g. a refund. So even if a charge of less than £12 isn't going to spur the OFT into action, that's just their internal threshold - as consumers, we can still take direct action ourselves in the courts if we think the charge is unfair.

The OFT's view that the charge should just be for admin costs makes sense to me. In fact I'd go further than that and ask, what postage/stationery/staff costs? I appreciate that from the OFT's viewpoint it's not worth their while to take action for anything less than £12, but that doesn't mean that a charge of £12 or less is fair.

It's one thing if you default on your credit card payment for more than say a month, and you keep not paying, and the credit card company has to spend time and money sending you reminder letters, maybe even suing you for the payment you owe, etc. But if you're just a few days late, the most they're really out of pocket on is the interest for those few days on the amount of the late payment. They don't have any staff or postage or stationery costs in that sort of situation, at that stage - their IT systems just automatically bung a £25 charge on your next statement. The next statement is posted to you in the usual way, exactly as if you'd paid on time (only with an extra £25 charge on it, of course), so they've not incurred any extra postage or stationery costs. I bet they don't even have any staff costs, I bet no human even looks at it unless you're late for more than a particular period or the unpaid amount is significant. So personally, unless you're seriously late or late for a big amount, I don't see what admin. charges the credit card issuer would have for a payment that's been paid late but paid in full.

What does it mean for me? What can I do if I'm charged a late payment fee?

First off, big red warning: this post is NOT legal advice and you should get advice on your own individual situation if you want to take any action on this sort of thing (e.g. it's different if you were supposed to have paid by direct debit and you're late - the charge might well not be unfair in that situation). Obviously what I'm going to say only applies if you were just a bit late but otherwise you paid your credit card bill in full. If you're seriously behind on your credit card payments or owe large amounts, or both, you have bigger problems than default charges to worry about and ought to get help e.g. from a consumer advice center or legitimate debt adviser.

That said, this is what I personally am going to do. If I am a little late with paying a credit card bill, but I've still paid the full amount I was meant to, from now on:

• I'll check the OFT's guide for consumers and consumer advice agencies setting out the principles on which default charges should be calculated of 5 April 2006: OFT's action on credit card default charges, 5 April 2006 (by the way I think the link in that guide to http://www.oft.gov.uk/Business/Legal/UTCC/guidance.htm is wrong, I think it should be this instead)
  
• I'll query the default charge with the credit card company. By phone, first.
• If they agree to refund the charge, I'll note down the time and date of the call and the name/reference of the person who agreed it, and confirm that to them in writing - especially the fact that they agreed to refund the fee!
  
• If they don't agree to refund the late fee, then I'll write to their complaints department.
  
• When I phone or write to them, I'll say I think their charge for my late payment is unfair, and so does the Office of Fair Trading - referring them to the OFT press release and statement on the law - and I'll ask them to refund it, maybe just less a fair interest rate on the amount of the payment for the few days when the payment was overdue.
• If they don't:
• if the charge was for £12 or more, I'll say I'm going to report them to the OFT to take enforcement action
• whatever the amount of the late payment fee (well if it was £1 or less I probably wouldn't bother querying the fee in the first place), I'd say that I'm going to take them to court for a ruling that the default charge is unfair
• If they still don't refund it, I'd report them to the OFT - and I'd also start legal action against them. Seriously, I would make a claim in court, just on principle, but it's entirely your own decision, after consulting your own lawyer, as to whether you'd want to sue them yourself (don't forget you'd have to pay legal fees, so it may not be worth your while - though hopefully the credit company won't want to have to pay their own lawyers or risk the court deciding that their charges really are unfair, so with any luck they'll pay up to avoid going to court - as happened when Nigel Roberts sued a spammer).

Good ol' OFT!

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