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Feds cap credit card late fees at $25

Fee limit among several new protections from Credit CARD Act

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Fees for being late making a credit card payment or going over your spending limit have been capped under rules approved in June 2010 by the Federal Reserve Board.

Late payment fees will be capped at $25 in most cases, and if consumers exceed their spending limits, they can't be charged more than the excess amount.

Fed finalizes limits on credit card late fees
CREDIT CARD FEE CAPS

The Federal Reserve has finalized new credit card rules that went into effect Aug. 22, 2010.

The rules include:

  • A cap of $25 on occasional late fees. Before the rule change, big-bank late fees averaged $39. The cap can be adjusted annually for inflation. (Editor's note: The late-fee cap rose to $26 in 2014).
  • A ban on inactivity fees.
  • The punishment can't be more than the crime. In other words, going over your credit limit by $10 can result in a fine of no more than $10.
  • If a company increases your interest rate, it must review that higher rate every six months.

From the Fed: Highlights of the card rule changes, Complete text of rules

The changes are a result of the Credit CARD Act of 2009.

"The new rules require that late payment and other penalty fees be assessed in a way that is fairer and generally less costly for consumers," Federal Reserve Gov. Elizabeth A. Duke said in a release outlining provisions of the final rule involving the Credit CARD Act.

President Obama signed the Credit CARD Act into law May 22, 2009. The first round of changes took effect Aug. 20, 2009, and the majority of provisions kicked in Feb. 22, 2010. The fee caps were announced in June 2010 and took effect Aug. 22 of that year.

22,000 comments
The final rule was shaped by more than 22,000 comments from financial sector representatives, consumer advocates and the public.

For example, the initial proposal called for the card issuer to charge a penalty fee for a violation, such as a late payment, based on the amount considered "reasonably necessary" to deter that type of violation.

In its final rules issued in June 2010, the Federal Reserve Board got more specific: It decided those who make one late payment will be assessed a $25 penalty instead of the $39 that was commonly charged before. A second late payment during the following six billing cycles will result in a $35 fee.

And card issuers can't impose penalty fees that exceed the amount of the violation. A consumer who exceeds a credit limit by $10 can't be charged more than a $10 penalty. Those late making a $25 minimum payment can't be charged a penalty of more than $25.

The rule also means that a consumer can't be charged multiple penalty fees for one transaction. So issuers can't charge both a late payment fee and a returned payment fee.

On the flip side, if someone doesn't pay a minimum payment for two or more consecutive billing cycles, the issuer can impose a late fee of up to 3 percent of the delinquent balance.

Banking industry reaction
In a statement, Kenneth J. Clayton, a senior vice president with the trade group American Bankers Association, says the rules aim to "make the penalty fit the crime, so that simple missteps result in minor penalties, while larger or repeated missteps can result in higher penalties.

"This brings to a close the most sweeping overhaul of the industry since the invention of credit cards. Taken together, the new rules will provide consumers with numerous tools for better management of their credit costs ... These new rules will provide greater protection, transparency and certainty for credit card customers," he added.

Consumer advocate reaction
Consumer advocates aren't overjoyed with the rules.

To Gail Hillebrand, a senior attorney with Consumers Union in San Francisco, the cap on late fees is still too high; her group would have preferred a $10 limit.

Michael D. Calhoun, president of the Center for Responsible Lending, based in Durham, N.C., also was critical of the final rule. While acknowledging in a statement that the fee limits are an improvement over the current caps, "firms will have considerable leeway in justifying even higher amounts."

This brings to a close the most sweeping overhaul of the industry since the invention of credit cards. Taken together, the new rules will provide consumers with numerous tools for better management of their credit costs.

-- Kenneth J. Clayton    
American Bankers Association    

He also complained that the late fees card issuers charge are unrelated to their losses, but instead "are just another way to raise costs for credit card consumers."

While the final rule prohibits the issuer from assessing "inactivity fees" if the consumer doesn't make new purchases with a particular card, Linda Sherry, director of national priorities for Consumer Action in San Francisco, wonders if the inactivity fee will instead take a new form, such as an annual fee if the consumer doesn't use his card a minimum number of times each year.

Vague rate reduction review
Another major segment of the final rule requires card issuers that have increased interest rates since Jan. 1, 2009, to determine whether the reasons for the rate increase have changed and reduce the rate "if appropriate."

The initial version of the Credit CARD Act required issuers that raised rates because of the credit risk posed by an individual consumer, market conditions or other reasons, to review changes in these factors at least every six months and decide whether to reduce the annual percentage rate. But it didn't require a specific rate reduction.

The final rule requires a review of interest rates at least every six months, and if a lower rate is deemed "appropriate," the interest rate must be reduced within 45 days. The semiannual reviews must continue unless the rate is reduced to where it was before the higher rate kicked in.

See related: Guide to the Credit CARD Act of 2009

Updated: December 28, 2011



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