Have you ever been late with a credit card payment? How about overdrawn your account or exceeded your credit card limit? If so, you'll know these simple mistakes can cost you as much as $50 in penalty fees.
But a confidential report by two major banks leaked to the Sunday Telegraph has revealed the true cost to the bank is as little as $4, and in some cases only a few cents.
The report calculated the average cost of exceptions (taking into consideration the costs of staff, branch networks, insurance, interest, fraud and bad debts) is at most $3.90 to $4.50, depending on the bank.
That's significantly lower than the $35-$50 fees applied by most financial institutions.
Exception fees for late payments are more difficult to calculate as the amount differs depending upon how long an amount is overdue.
The report comes in the wake of Reserve Bank data last week which showed
banks made more than $1 billion from fees last year.
Penalty clauses in your banking contract (either your bank account or credit card agreement) are intended to act as a deterrent to certain behaviours, such as exceeding your limit or being late making payments. According to banking industry regulations, the bank is entitled to seek to reclaim the costs of these exceptions, which are deemed as contract violations on your behalf.
The trouble is that banks don't publicly disclose the true cost of the exceptions to them, which allows them to charge as much as they wish in exception fees.
This report is significant in that it is the first time the true loss incurred by the bank in the event of an exception has been published. It demonstrates the penalty fee may be disproportionately higher than the financial loss suffered by the bank.
Most consumers are unaware that penalty charges are not legally enforceable. If customers choose to challenge the fees (either by themselves or represented by a company such as Financial Redress), they can recuperate any amount which exceeds the true cost of the exception to the bank.
The report has angered consumer groups, who argue marginal products (accounts and credit cards which permit the user to exceed their balance or limit) are unfair. They point to the results of a survey conducted by ING last year which said 71 per cent of customers would prefer their transaction was declined instead of being approved and incurring penalty fees and interest.
There are a few steps you can take to avoid exception fees. Understand the fees you may be charged on your account (check out our
fee guide), always pay at least the minimum payment on your credit card by the due date and monitor your credit limit to ensure you don't exceed it.
You can also investigate exception-free-accounts, offered by some banks which do not have penalty fees, but these accounts also often do not have debit cards or cheque books.
