Default Charges - Citicards under fire

The Consumer Action Group report that a judge has found Citibank's default charges of £12 excessive and that they cannot justify fees in excess of £8. In an action brought by a Consumer Action Group user, the judge told Citicards that their current £12 charge was 'plucked out of thin air'. He went onto compare a default charge with the cost of sending out a solictors letter and concluded that a fee of only £8 could be justified. Given the use of automated systems, even that level of charge is open to challenge, but there has been little success to date in getting lenders to disclose the full details behind their charging policies.

Despite the OFT's much vaunted intervention to reduce credit card default charges to no more than £12, it continues to fail to take legal action against lenders to establish the true costs of default. Lenders, in the meantime, continue to charge multiple fees in order to increase their profits. So, a borrower that goes over their credit limit, fails to make the required repayment, and bounces a cheque would actually incur three separate £12 charges totalling £36.

In correspondence to Debt on our Doorstep in October 2006, the OFT stated that "...we will not investigate further a single default charge of £12 or less, but dual fees totalling more than that, flowing from a single instance of default, may merit further investigation."

Despite this statement, no action has been taken and no undertakings obtained from lenders to stop this practice.

Citibank also adopts the usual sub-prime tactic of removing 'promotional' interest rates if a borrower misses a payment, and reverting agreements to a much higher 'standard rate'. So, for example, although it currently advertises a Platinum card with a 'typical' APR of 17.9%, this would increase to its standard rate of 28% APR if a borrower misses a payment, goes over their credit limit, or breaches the agreement in any other way. This interest rate hike takes place in addition to the £12 fees that are charged. Again, no action appears to be planned by the regulator.