New Credit Card Rules Would Mean Smaller Fees for Smaller Mistakes

Credit card companies have devised any number of clever ways to siphon money out of consumers' wallets, but the ones that bother people the most are probably those that impose big fees for small mistakes: You're late one day paying a $5 balance, you get charged $39. Go $3 over your credit limit, you get charged $31. Short-term issues with your credit give you permanently higher interest rates.

But the rules of the credit card game are about to change: Consumers should soon find they are paying lower fees for late payments, over-the-limit fees, and other penalties -- fees proportional to their mistakes. Interest rate hikes will need to be reviewed every six months and lowered if the conditions that led to the increases no longer apply.

These enhanced consumer protections and others -- assuming they go into effect unchanged -- will all come out of the Federal Reserve's proposed new rules for the implementation of the Credit Card Accountability Responsibility and Disclosure Act of 2009 -- commonly called the Credit CARD Act. After a one-month comment period, the amendments could be adopted as is, or changed based on comments. The CARD Act goes into effect on Aug. 22, 2010.

Rules Will Require Reductions in Interest Rates

Federal Reserve Governor Elizabeth A. Duke said in a press release issuing the proposed rule, "The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year."

Given that the credit card companies went on an interest-rate raising frenzy throughout 2009, this rule does address the need to reevaluate those rate increases every six months. That review could be required indefinitely. In the notice to be published in the Federal Register, the Fed says, "The proposed rule requires that a card issuer continue to review a consumer's account each six months unless the rate is reduced to the rate in effect prior to the increase. In some circumstances, the proposed rule may require card issuers to reevaluate rate increases each six months for an indefinite period."

The reevaluation of rate increases "applies to both increases in annual percentage rates based on factors specific to a particular consumer's creditworthiness, and to increases in annual percentage rates imposed due to factor such as changes in market conditions or the issuer's costs of funds." If after a review it is determined the rate should be reduced, the rule requires the reduction be made within 30 days of that evaluation's completion.

In addition to requiring a review every six months, credit card companies will be required to inform consumers of the reasons for increases in rates. This will give consumers the ammunition they need to question the rate increases, and make sure that the six-month reviews are done for the same reasons. For example, if a rate increase was made because of late payments and the consumer has paid on time for six months, the credit card company will be required to reduce the rate.

Reining in the Excessive Fees

The remainder of the rule change involves changes to how fees are imposed. In a 2006 GAO study of fees the GAO found that the six largest issuers of credit cards "reported that unpaid interest and fees represented about 10 percent of the balances owed by bankrupt cardholders." The GAO was not able to obtain from the issuers data on penalty charges these cardholders paid prior to filing for bankruptcy. The GAO also found that fees had doubled in ten years to $34 for late payments and $31 for over-the-limit fees. Penalty fees on late payments can go as high as $39.

The new rule will reverse that rising fee trend. Credit card issuers will be prohibited from charging penalty fees (including late payment fees and fees for exceeding the credit limit) that exceed the dollar amount associated with the consumer's violation of the account terms. For example, card issuers would no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee could not exceed $20. Even that figure seems high because it allows the credit card companies to charge a 100% fee on a $20 late payment, but it's better than the current $34 or even $39 now allowed.

But even more outrageous is when a credit card issuer charges $31 or $39 when a consumer charges just $5 over their credit limit. This will no longer be allowed. Credit card issuer will be unable to charge a fee that is more than the amount the consumer went over their credit limit. So if a consumer exceeds his or her credit limit by $5, the fee can be no higher than $5.

Inactivity fees -- charges based on a consumer's failure to use their account to make new purchases -- will be banned. Such fees have been increasing in popularity among credit card issuers since the Credit CARD Act was passed. It's good to see that the Federal Reserve plans to nip that trend in the bud.

Credit card issuers also will be prevented from charging multiple penalty fees based on a single late payment or other violation of the account terms.

You can comment on the proposed new rules or follow comments written by others at the Federal Reserve Web site after the notice is officially published in the Federal Register.