Consumers are being charged more than £300 million a year in unlawful penalties on credit cards, the competition watchdog has claimed.
The Office of Fair Trading said the default charges had been set at a "significantly higher" level than was legally fair and called on all card issuers to recalculate their penalties.
The OFT said it would consider any penalty charge of more than £12 as being unfair, and it was likely to challenge those above this level unless there were exceptional business reasons for them.
Default charges are levied by card providers if people are late with minimum repayments, exceed their credit limit or make repayments by cheque or direct debits which are not honoured.
The group did not have figures on the average default charge, but recent research c arried out by money supermarket.com found the average charge was £22.68, with some as high as £25.
Figures from payments industry body Apacs show that nearly one in five credit card holders was hit with a penalty charge last year.
The OFT said default charges should only be used to recover certain, limited administrative costs, such as postage, stationery and staff costs.
It said a proportionate share of the cost of maintaining premises and the IT systems needed to deal with d efaults could also be included.
But it said it would not consider a default charge to be fair just because it was less than £12, and would only consider those above this level to be reasonable if there were exceptional business factors, such as if a card issuer required people to make monthly minimum repayments by direct debit.
The OFT has given the industry until May 31 to respond to its statement, but it said it would be prepared to take the issue to court if card issuers did not agree to reduce their charges.
It added that the principles it had set out also applied to default charges on overdrafts, store cards and mortgages.
OFT chief executive John Fingleton said: "We expect credit card issuers to adjust their default fee levels quickly. We have not ruled out future legal action if the market does not respond positively."
The OFT, which cannot impose a cap, had been expected to rule against the credit card companies after provisionally concluding in July the default fees were excessive.
It marks the first major price intervention in the sector since measures imposed on small business banking in 2002.
Investment bank Credit Suisse estimated UK banks generate about £2 billion of revenue from penalty charges across bank accounts and credit cards.
It is thought a clamp-down could cost them a total of around £1 b illion in gross profits.
It said the worst affected ones, in terms of the impact as a percentage of group profit, were likely to be Lloyds TSB, Alliance & Leicester, Barclays and HBOS.
Moneyexpert.com, a financial comparison website, said a bounced cheque would on average see the customer £32 out of pocket compared to £24 two years ago and an unpaid direct debit and an unpaid standing order both cost the customer £31.
Analysts said banks could offset the hit to default fees by increasing charges elsewhere, such as with higher interest rates or the reintroduction of annual card fees, although the latter would be hugely unpopular and difficult to make stick.