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What the rules on credit card penalty fees mean to you

By Leslie McFadden · Bankrate.com
Friday, June 18, 2010
Posted: 9 am ET

On Tuesday, I wrote about the rules approved by the Federal Reserve Board that will restrict credit card penalty fees beginning on Aug. 22, 2010. Yesterday I interviewed Nick Bourke, director of the Pew Safe Credit Cards Project, for a little more insight on what the rules mean for consumers.

"We ought to see most people being subject to lower penalty fees," he says. "Right now, Pew's research shows that most people with credit cards will be subject to a $39 late fee. But as a result of these rules, we should see most of those fees come down to about $25."

Issuers can charge up to $35 if the same offense occurs within six billing cycles.

Banks can also charge more than $25 if the issuer "can show that the costs it incurs as a result of late payments justify a higher fee," according to a fact sheet on the new rules from the Fed's website. Yet issuers can't do the justifying once a customer is late. The fees would still have to be disclosed upfront, says Bourke.

The rules also ban annual or inactivity fees charged for infrequent card use. If you don't use your cards regularly, though, nothing prevents an issuer from closing or lowering your card limit. As our recent study of credit card fees shows, a number of card issuers may close accounts if they go unused for too long. So, you should still use credit cards that you want to keep on a regular basis.

The rules leave much to be desired when it comes to penalty interest rates. "Issuers remain free to charge whatever penalty interest rates they want on seriously delinquent accounts," says Bourke. The median penalty interest rate among the 12 largest bank card issuers is 29.9 percent, he says.

Issuers will have to re-evaluate certain rate increases every six months and reduce rates "if appropriate," but the rules require no specific reductions. In other words, once your rate increases, don't count on it to drop back to its previous level.

Do you think the rules go far enough?

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3 Comments
margo
June 29, 2010 at 12:01 am

As I found out quite by accident there are no rules to this credit card game. I have a friend of 25 years who started having credit card problems several years ago. The problems were all from $10,000 worth of instant gratification buying . He ended up with over the limit and late payment penalties totaling $78.00 added to his balance every month. As a good friend, I helped create a budget for him and showed him how to get current and pay down the balance. Of course, his interest rate went up but that was to be expected. Now here is the ugliness and unfairness by the credit card companies. I have never been close to being over my credit limit or late. If fact my credit score is in the mid 700's. Dispite these facts my credit card companies raised my interest rate to the same rate as my friend. I called the companies but they didn't care. They were not going to reduce my interest rates! So what's the moral of this story. We are at their mercy no matter how well we handle our finances.

t fu
June 22, 2010 at 5:22 pm

Just returned from a trip from Hong Kong and China

In HK, all the charges are in HK $, thus avoiding the 3% Dynamic exchange fee. The only one that charge Dynamic exchange fee is Bank of China subsidiary that process Visa CC transactions.

In China, things gets really bad. Each time I ask to be charged in RMB, it came out to be in US$. After protest, it still come up with a statement saying that I was offer to reject the US$ option (which I did not). The bank say all I have to do is to cross out the option line and all the fine prints and I will be fine and will be in RMB. When I came home and check my statements, it all had the 3% Dynamic Exchange rated added onto my Schwab Credit card.

It is a big scam by Bank of China.. Be careful when you use credit card in China.

All my charges including Shangri-la are in US $ even I crossed out all the options in the US$ option, also wrote big sign as RMB. Is you want, I can eMail you the credit card slips.

Reggie Masterson
June 18, 2010 at 2:23 pm

Unfortunately, I foresee lots of schemes by the banks to get around these things. They aren't going to take a drastic cut in their revenue source lying down. With 54 million credit card holders in debt, the banks will want to squeeze everything out of them that they can. 72% of the cards they issued before the new rules would increase interest rates for one missed payment. I think it's naive to think credit card fees are going to go away.