Credit card experts are predicting that annual fees on cards are set to make a comeback as rising levels of bad debt hits credit card companies’ bottom line.

Precious Plastic 2006, a report published today by Pricewaterhouse Coopers, the accountancy firm, predicts that more credit card companies will follow MBNA, which is set to introduce annual charges of £25 and £15 on a minority of cards this December.

The imposition of annual charges — which had almost become extinct among credit card companies — is driven by rising levels of bad debt, heightened regulatory scrutiny and the growing numbers of so-called rate tarts, who consistently shift card balances between cards to make the most of introductory zero per cent offers.

Rate tarts are estimated to have cost the industry about £600 million, despite the introduction by many card issuers of a 2 per cent balance transfer fee.

Richard Thompson, partner at PwC, said: "Almost all credit card companies’ sources of income are under regulatory pressure. The Office of Fair Trading (OFT) has told them to reduce late payment charges and the Competition Commission is looking at the high annual percentage rates (APRs) on store cards.

"Annual fees are a transparent upfront way for banks to raise the profitability of credit cards.

Half the population of card borrowers clear their bills in full every month and an annual fee will encourage these users to either ditch their card or use it more often."

PwC also found that the profit margins of banks and credit card companies have been hit by rising levels of bad debt. This prompted the accountancy firm to analyse the rising numbers of individual voluntary arrangements (IVAs), which enable over indebted borrowers to negotiate repayment of their debts.

The report, which examined the 1,257 IVAs registered in July 2005, found that three quarters of debtors had fallen into financial difficulties as a result of "living beyond their means", rather than unavoidable events such as divorce or unemployment.

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