Credit card firms warned on 'snowballing' fees for late or missed payments

Credit card companies have been warned by the UK's financial watchdog to avoid piling on extra fees when customers have trouble paying their bill.

The Financial Conduct Authority (FCA) has discovered that some customers who incur a late payment fee of £12 could end up paying up to £36 as the charges snowball - and these fees may be charged again, month after month.

The regulator has told companies to stop hitting struggling customers with multiple or consecutive charges, and to treat missed payments as a sign that customers were in financial difficulty.

Which? takes a look at the credit card fees that can catch you out and what to do if you're struggling with credit card debt.

How late fees can escalate

Credit card companies can charge you fees in a range of situations, including:

• if you pay your bill late.
• if you exceed the agreed limit
• if a payment bounces due to insufficient funds.

The FCA has conducted a review of how these fees were charged and which type of customer incurred them.

It found that fees can rapidly escalate - and in some instances, customers were charged multiple fees in a single billing cycle.

Say, for example, a payment bounces because you haven't paid your bill. You could be charged both a returned payment fee and a late payment fee. These fees may, in turn, push you over your agreed limit - which will trigger another charge to be applied. If each of these fees is £12 - which is fairly typical - you could end up paying £36 in total.

In some cases, over-limit fees were triggered as a result of authorised transactions, which had been given the green light by a provider. In fact, many customers were charged this fee on multiple occasions in a 12-month period.

Consecutive over-limit fees are also a problem. This could happen when a customer goes over their limit because of an authorised transaction but fails to bring the account back into the black, triggering over-limit fees in consecutive cycles of three, four or five or more times in a 12-month period.

For peoplewith lower credit limits, these fees and charges represent a higher proportion of their outstanding debt, the FCA found in its review.

Read more:find the best credit card deal for your circumstances

Are companies doing enough?

The FCA also looked into whether firms recognised red flags that could indicate some of their customers were in financial difficulty - such as multiple late payments.

The research found that a 'significant number' of customers who missed a payment did so more than four times in a 12-month period. With no cap on fees in place, this could spiral to eight or 12 missed payments in a year.

Yet the FCA found firms were continuing to apply fees to people in these circumstances, potentially putting them in a worse position.

Paying a bill late can be a sign that a borrower is facing money trouble, the FCA warned, and companies should be doing more to assist these borrowers.

Jonathan Davidson, executive director of supervision - retail and authorisations, at the FCA, said: 'It is unacceptable for firms to ignore signs of customers struggling financially and continue to charge them fees for missed payments which they likely can't afford.

'Our research showed that a large number of customers were often missing payments but continuing to be charged fees. In some cases, customers ended up being charged multiple fees as a result of each missed payment. This may suggest that firms are not adequately identifying and dealing appropriately with signs of actual or possible financial difficulties.'

Find out more: best and worst credit card providers

What is being done?

The FCA says the firms included in its research have reviewed their fee-charging strategies and the effect it was having on their customers.

As a result, a number of changes have been made, with some companies removing and capping fees. The FCA claims this has led to consumers saving more than £80m.

The FCA has also written to all credit card companies to highlight the findings of its review and is encouraging firms to consider the effect their fees and charges have on customers.

It recommends firms ask:

• what do they regard as signs of actual, or possible, financial difficulties? Are (multiple) fees and charges considered as one of those signs?
• whether they use system flags for customers who are repeatedly incurring fees on their accounts?
• what range of actions they can take upon identifying a sign of actual or potential financial difficulty?

What to do if you're struggling with credit card debt

If you have a credit card and the debt is spiralling because of the fees and interest, there are steps you can take to get back in control.

A 0% balance transfer credit card can help you freeze the interest on existing debt, giving you the breathing room to pay down what you owe. These deals allow you to move your debt to a credit card with a 0% interest-free period, often lasting up to two years or more.

You may also be able to talk to your provider to come up with a more manageable repayment plan so you can avoid being hit with fees.

Keep in mind that missed credit card payments can drag down your credit score, making it hard to apply for other credit cards, loans or a mortgage in future. You can find out more about re-building your score in our guide to improving your credit.

• For more read: 44 tips on paying off your debt