Consumers are set to benefit from reduced bank charges after the Office of Fair Trading (OFT) announced that many of the current charges were “unlawful”.

The OFT announcement means that from now on fees for late payment of credit card bills, bank overdrafts or mortgages must not be set at a punishing level by banks. The OFT said that the charges should now only recover the costs incurred by the provider.

And it said charges of over £12 for a late payment of a credit card bill could be deemed as unlawful.

The Citizens Advice Bureaux welcomed the announcement as it claimed many people were suffering considerably under the current system.

It gave the example of a Suffolk woman in receipt of benefits totalling £65 a week, who had set up an account to pay four monthly direct debits of about £5 to £10 each. On four occasions she did not have sufficient funds to cover the direct debit, and she was charged £32 for each unpaid direct debit – a total of £128 – or two whole weeks benefit.

Sue Edwards, Senior Social Policy Officer for Citizens Advice, said: “This announcement from the OFT is excellent news for the many millions of people in the UK who pay banking charges every year.”