Editorial Policy

A Guide to the New Rules for Credit Card Fees

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By Eva Norlyk Smith, Ph.D.
July 6, 2010

Credit card late fees and over-the-limit fees have cost American consumers a pretty penny over the years, running at an estimated $22.9 billion per year in 2009 alone. This may soon change, however. Since February, the new rules of the Credit CARD Act have put curbs on credit card over-limit-fees, and come August 22, cardholders will see significant modifications to credit card late fees as well.

According to details of the new credit card rules recently released by the Federal Reserve, credit card lenders in the future will only be able to charge late fees that are “reasonable” in relation to a cardholder’s offense. In particular, late fees cannot be higher than the minimum payment due. In short, the late fee charged for a cardholder who pays a $20 minimum monthly payment late could no longer be a hefty $39, but a maximum of $20.

For cardholders with minimum monthly payments higher than the $39 typical late fee, there are additional protections. Late payment fees, generally speaking, cannot exceed $25, unless one of two criteria is met. Firstly, if the cardholder made another late payment within the last six months, the late fee can be as high as $35. Secondly, if a card issuer is able to demonstrate that the costs incurred from the late payment are higher than $25, the issuer will also be able to set the late fee higher than $25. Card issuers would have to disclose the higher penalty fees up front, however, so that prospective credit card applicants can do their own comparison of credit card fees.

The new rules of the Credit CARD Act for making penalty fees more “reasonable” extend to over-the-limit fees as well. Already, under the new credit card law, credit card lenders cannot charge over-the-limit fees, unless the cardholder opts in for overdraft protection. Starting in August, over-the-limit fees cannot be higher than the amount of the overdraft. In short, for a $15 overdraft, the over-limit fee cannot exceed $15.

The new credit card rules will also bar card issuers from levying inactivity fees on cardholders who don’t use their card for a while.

While consumer advocates had hoped for curbs on penalty interest rates as well, the Fed guidelines give credit card issuers free hands to charge penalty rates as high as they want. The new credit card rules bar card issuers from raising interest rates retroactively on existing credit card balances unless the account is seriously delinquent. However, card issuers can still introduce penalty rates for future charges, and for cardholders with a promotional 0% APR balance, a late payment can also trigger penalty rates, presently ranging from 24.99 to 29.99 percent for most card issuers.

Also effective in August will be the stipulations of the Credit CARD Act requiring card issuers to re-evaluate rate increases every six months with a view on reducing rates, if the factors that triggered the rate increase have improved. However, the Fed guidelines offer no directions for the specific reductions required. In short, once a rate increases, card issuers might shave one or two percentages off the credit card APR at the six-month review, but they are under no obligation to drop the rate back down to anywhere its previous levels.