Days of free credit cards numbered

After a string of costly court rulings, credit card companies could start imposing annual fees for owning a card, a new report predicts.

Decisions from the Competition Commission and the Financial Services Authority (FSA) have cost credit card companies as much as £1 billion a year in profits - and providers might well look to increase interest rates or re-introduce annual fees to compensate.

"With fierce competition and rising bad debts already hitting issuers, it's hard to see how the banks will absorb £1 billion of lost revenues," said Richard Thompson of PricewaterhouseCoopers, author of the report.

"We are likely to see a 'waterbed effect', whereby charges pushed down in one area pop up somewhere else.

"To put it in perspective, card issuers would have to levy annual fees costing the average credit card user £35 a year to recoup the potential £1 billion loss.

"If lenders tried to recoup this through interest rates alone, we would see APRs increase by two percentage points on average."

In the last year banks have been hit by a ruling that they should not charge more than £12 on penalty fees for things such as late payments and exceeding credit card limits (full story).

Additionally, card providers are coming under pressure over the selling of lucrative payment protection insurance (full story).

And on top of this, there are ongoing investigations into credit card interchange fees, which shops must pay on credit card transactions (full story).

Annual fees were removed from most credit cards in the mid to late 1990s, with only a few providers still levying charges and many of these waived if the card was used beyond a certain amount.

But between June and September, 19 credit card providers increased their interest rates and the PricewaterhouseCoopers' report - Precious Plastic 2007 - finds re-introduction of annual fees could be the next step. XXX