MILLIONS of credit card users will have penalty charges slashed after companies were ordered to stop profiting from “fines” for late payments.

The Office of Fair Trading said yesterday that credit card providers could only charge for the actual costs incurred in processing late payments, such as postage, stationery and staff costs and that penalties should be no more than £12.

The OFT said that it would be applying the same principle to other charges such as those for overdrafts, store cards and mortgages. Consumers stand to gain up to £1 billion a year from the ruling, which was greeted with dismay by the banking industry.

However, consumer groups said that the move did not go far enough and called for the charges to be reduced from the current average of £22 to £5.

Consumers are being charged more than £300 million a year in penalties on credit cards, according to conservative estimates by the OFT. It described the current average charges — of about £22.68 — as unlawful and called on card issuers to recalculate their penalties. The OFT said that it would be prepared to take card issuers to court over penalty charges of £12 or more.

Default charges are those levied by card providers if people are late with a minimum payment, exceed credit limits or make repayments by credit or debit cards that are not honoured.

The watchdog admitted that £12 did not necessarily represent a fair charge, but said that it was not prepared to go to court for any lesser charges. In its statement, it said: “In the circumstances we have considered the best way to achieve a swift reduction in fees that are unjustifiably high, while avoiding heavy-handed regulation.”

Emma Bandey, the personal finance campaigner for Which?, the consumer organisation, said: "We are delighted that the OFT has finally officially acknowledged what Which? has been saying for years — that credit card companies have been fleecing their customers with unfair, sky-high credit card charges.

"The OFT has also now given a shot across the bows to banks to ensure their charges are fair too."

She added: "It's now the turn of current account providers to do the decent thing and act immediately on unauthorised overdraft charges."

Stephen Hone, of the website penalty-charges.co.uk, said: "They've sat down, had a nice chat with the banks and decided on something that will keep them from having to take them to court. But at what point have they spoken to the consumers? The charges are still extortionate.”

Mr Hone, a law student who took Abbey National to court over a £32 penalty and was paid £5,000 by the bank to drop his claim, said: “People have been paying these ‘illegal’ charges for the past six years. They should be considered retrospectively and those who have defaulted should be removed from the default register.”

Apacs, the main trade association for the credit card industry, said that it was unhappy at the measures and gave warning that they could lead to “a return to annual fees”. Paul Smee, the chief executive of Apacs, said that the OFT had based its conclusions on talks with eight card companies, which meant that “each individual card company will now have to consider whether it agrees with the OFT’s interpretation”.