LONDON (Reuters) - Consumers face higher rates and fees on credit cards as lenders battle rising bad debts, funding constraints and reduced appetite for borrowing, accountants PricewaterhouseCoopers said on Monday.

These changes, combined with rising regulatory and government scrutiny, would shake up the market and prove the current model based on fee-free credit cards was unsustainable, PwC said in an annual report on consumer credit.

"Lenders will be unable or unwilling to increase supply sufficiently to match demand. This will leave consumers surprised at both the cost of credit and the difficulty in gaining access to it," PwC partner Richard Thompson said.

Britain, the only country in Europe with more credit cards than people, has seen borrowing drop 3 percent in the past year as consumers cut back and banks tighten the purse strings.

But lenders have still been left with rising bad debts.

Impaired loans hit 6 percent of outstanding balances and could rise to 9 percent by the end of 2010, PwC said.

"This would have enormous implications for the profitability of credit cards in the UK market. Large-scale change within the sector over the next few years is inevitable," Thompson said.

PwC predicted lenders would scrap current business models -- built on free credit cards but costly borrowing -- predicting premium customers would see higher standard fees, while marginal spenders will have pay to hold even a basic card.

Lenders will also reposition cards, tapping innovations such as pre-paid cards, contactless payment, and even payments by mobile phone, PwC said.