8.5 Penalty fees and credit cards

Penalty fees, otherwise known as default charges, are incurred when you go against your credit agreement and are added to your outstanding credit card balance.

You will incur these fees if you don’t pay your bill on time or miss a payment, if you go over your agreed credit limit or if your credit card repayment bounces (gets returned because of insufficient funds).

In previous years, credit card companies would often charge between £20 and £35 if you defaulted on your credit card payments. However, these were deemed to be unfair by the Office of Fair Trading which was then permitted to set an upper-limit for what an acceptable fee is. It was decided that the most you could be charged for a ‘default’ on your credit card account is £12.

These fees can soon add up, especially if you incur a late payment fee which then pushes you over your agreed credit limit which would be cause for you to be charged two penalty fees totalling £24 if the situation remained the same when the next statement is issued.

You will incur one penalty fee for each month your credit account is over its limit and each month you miss or pay a bill late.

The best way to avoid these penalty fees is to make sure you stay within your credit limit and by ensuring that your payments are received by your card company on time and not returned due to insufficient funds.

There are other downsides to incurring penalty fees, aside from being charged £12 a time.

Firstly, any defaults you make will show up on your credit report and will damage your credit score which will likely deter other lenders from offering you other credit facilities at the most competitive APR, if at all.

Secondly, if you are on a 0% balance transfer and/or purchases deal, you stand to lose it if you incur a penalty charge. Your balances will then be charged at your standard purchase rate APR of around 15.9%.

Talk your way out of a fee

Sometimes, credit card companies can be very understanding and can, at their discretion, choose to let you off the penalty fee and the black mark on your credit report.

This will only usually be the case if it is your first-time offence. In fact, on some occasions, your credit card company may contact you (normally by telephone) to alert you to the unusual activity on your account if it is very unusual for you to go over your credit limit. At the end of the day, it is always worth pleading your case and trying to come to some sort of agreement with the card company, especially if it is very unlike you to incur a penalty fee.

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