ANNUAL fees on credit cards are set to become the norm by the end of this decade as providers seek to rebuild profits, financial research company Defaqto has predicted.
But providers risk "significant contraction" in the UK credit card market as customers, stung by annual fees, switch to debit cards instead.
Defaqto's head of banking, David Black, believes more providers will follow the lead of Lloyds TSB and Barclaycard.
The latter is considering introducing an annual fee of up to £20 for customers who do not use their card regularly. Those who do not spend enough on the card or who have not used it for a year are likely to be affected.
Barclaycard defended its possible decision by saying the cost of maintaining unused accounts is borne by regular borrowers.
Morgan Stanley and Co-operative Bank have both recently announced they will charge some of their credit card customers. Lloyds TSB charges £35 a year for customers who do not use their cards regularly.
Black said: "Reports that Barclaycard is considering an annual fee is not a surprise and my expectation in the years ahead is that there will be a gradual move towards annual fees in the credit card market.
"However, this will herald a significant contraction in market size as people who clear their outstanding credit card balances on a monthly basis will, as they start facing annual fees, jettison credit cards in favour of using debit cards instead."
Independent financial comparison website MoneyExpert.com has found that one in eight credit card companies now charge an annual fee on at least one of their products. The highest fee is about £275 a year and the lowest £24.
The Office of Fair Trading's ruling in August last year to limit penalty fees charged by credit card providers to £12 has hit profits and prompted many to look to hit back by raising
interest rates and imposing new charges and fees, Defaqto said.
Card firms have also closed long term inactive accounts - Barclaycard, for instance, shut 1.5 million accounts in 2006.
Nick White, director of financial services at uSwitch.com, said implementing a fee for inactive credit card customer was not the key issue. "The problem is the level of transparency around the criteria used to select the customer charged," he explained.
"Without this, customers do not know how to manage their credit card account to ensure they do not fall into this category."
However, consumers can still beat the card firms by switching to more competitive products as companies focus on winning new business.
Black said the credit card market still encouraged disloyalty by routinely restricting best offers - such as 0 per cent introductory balance transfer offers - to new customers.
"For this reason, it is still possible for consumers to 'play the market' and take advantage of what's available by reviewing and switching their credit card provider on a regular basis," he explained.
"This is the case whether they are seeking to transfer existing balances or to take advantage of cashback reward schemes. In many cases it can be advantageous to use different cards for different purposes. By closing unused credit card accounts, the consumer will often be able to return to the same provider at a later date to take advantage of offers restricted to new customers."
However, despite paying for the privilege of using a credit card, customers of fee-paying cards are not getting deals to match.
Only two cards offer any kind of introductory offer on balance transfers or purchases, at a rate of around 5.5 per cent for six months. The average standard APR on balance transfers is 16.78 per cent and on purchases is a staggering 27.1 per cent.
Only one fee-paying credit card on the market offers cashback and three have a shopping reward programme. However, other incentives include a concierge service, airport lounge facilities, medical insurance, refund protection and guaranteed hotel accommodation.
Sean Gardner, chief executive of MoneyExpert.com, said the rising tide of bad debt hitting banks and other credit card firms was forcing providers to tighten their belts and think of new ways to make money.
"We thought we'd seen the end of annual fees on credit cards, but we think there could be a return sooner rather than later," he added. Credit card companies will be under pressure to improve profits and reduce bad debts, and that could mean finding customers who are prepared to pay for credit.
"Many of the fee-charging cards are aimed at the well-off who want exclusive deals."
