Editorial Policy

Fed’s New Rules for Credit Card Fees Draw Fire

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By Eva Norlyk Smith, Ph.D.
March 16, 2010

The Fed recently released its guidelines for the last stage of the implementation of the Credit CARD Act of 2009. The new rules include limitations on credit card penalty fees, which are set to step into effect in August this year.

The Credit CARD Act stipulates that going forward, credit card companies should only be able to charge credit card fees that are “reasonable and proportionate” in relation to the offense. The interpretation of exactly what is “reasonable and proportionate” was left to the Federal Reserve Board to specify, as has been the case with other details of the new credit card law.

Under the new guidelines proposed by the Fed, the penalty fees charged by credit card issuers cannot exceed the amount of a violation. For example, if a cardholder sends in a $25 minimum payment past the due date, the resulting late fee cannot exceed $25. Similarly, when cardholders go over their credit limit, card issuers can no longer charge a fee higher than the amount by which the credit limit was exceeded. In other words, if you exceed your credit limit by $20, card issuers will no longer be able to charge a $39 over limit fee as they currently do. (And of course, under the new law, cardholders would still have to opt in for credit card overdraft protection for card issuers to be able to charge a fee).

Barely off the presses, the Fed’s proposed guidelines drew fire from consumer groups. Many consumer groups argued that capping credit card fees at transaction dollar amounts leaves the door wide open for higher penalty fees in the future. For example, if a person’s minimum monthly payment is $300, the new rules, in theory, would allow card issuers to charge a $300 late fee.

Given the competitive credit card environment, this is not a likely scenario. Still the example illustrates how the new Fed guidelines do little to effectively cap credit card penalty fees. The Fed rules would only reduce late payment fees for people with a balance of less than $2,000 (presuming a 2 percent minimum payment), a minority of credit cardholders. Consumer advocates had hoped for a percentage fee capper, such as 5 or 10 percent of the amount due, to comply with the requirement of the Credit CARD Act to make fees ‘reasonable and proportionate.’

Other parts of the Fed’s guidelines were met with greater approval. Under the new rules, credit card companies will no longer be able to charge multiple penalty fees on single transactions. The Fed also closed the door on inactivity fees, which some credit card issuers have introduced for cards that are not used on a regular basis. Some consumer groups, however, pointed out that the Fed guidelines do not prevent the inactivity fee from re-emerging under the guise of an annual fee, which is waived only if the cardholder spends a certain amount each year.

The public has 30 days to comment on the Fed’s proposed guidelines at FederalReserve.gov. The finalized rules will step into effect on August 22 this year.