New credit card rules limit penalty fees

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The last major batch of rules from the Credit Card Accountability, Responsibility and Disclosure Act, or Credit CARD Act, went into effect Aug. 22, 2010. While the major provisions took hold in February 2010, this last set helped ensure that penalty fees are “reasonable and proportional,” that rate hikes get reviewed every six months and that gift card recipients get more time to use the cards before they expire or incur fees.

The Aug. 22, 2010 rules won’t benefit everyone. “These provisions for this August will primarily help those who find it challenging to manage their credit card, as these provisions really relate to late payments and interest rate increases, which are often based on a deterioration in their credit history,” says Nessa Feddis, vice president and senior counsel for regulatory compliance at the American Bankers Association.

New safe harbor cap on fees

The language in the Credit CARD Act requires that penalty fees be “reasonable and proportional to the violation of the account terms.”

The typical late fee and overlimit fee is $39, says Nick Bourke, director of the Safe Credit Cards Project for the Pew Health Group. “The Fed’s new rule will probably make most of those fees go down to about $25.”

The reason for that is the CARD Act includes safe harbor amounts — a $25 penalty fee for the first violation and a $35 fee if another violation of the same type occurs in the next six billing cycles.

Issuers can charge more if they can show, through a cost analysis, that a higher fee is justified.

The safe harbor seems the likely route for many credit card issuers. “The rules that the Fed created for justifying anything more than the $25 safe harbor are kind of complicated,” says Bourke. “The issuer has to basically prove to their regulator that their costs are so high that they have to charge more than the $25 safe harbor in order to be compensated for those costs.”

Either way, fees must be disclosed upfront and any fee increases must be announced to the customer 45 days in advance.

Credit card issuers are prohibited from charging a penalty fee higher that the dollar amount associated with the violation. If you are late making the minimum required payment of $10, for example, you can’t be charged more than $10 as a late fee. If you go over your limit by $5, the issuer can’t charge more than $5.

Inactivity fees banned

Issuers will no longer be able to impose annual or inactivity fees for not using the card. Inactivity fees aren’t particularly common as our recent study of credit card fees shows, but issuers do and remain free to close infrequently used accounts. Use your cards if you want to keep them.

Periodic reviews of rate increases required

The final set of rules passed also addresses rate increases that occurred before the CARD Act was signed into law May 22, 2009. Issuers are now required to conduct evaluations on rate increases every six months if they were imposed on or after Jan. 1, 2009. If appropriate, they must reduce the rate within 45 days after the evaluation.

Don’t expect your rate to revert back to a previous level if it was raised within the past year. “There’s no specific amount of reduction in rate that’s required,” says Gene Truono, managing director of BDO Consulting in New York.

For the review, issuers can generally consider either the factors they looked at when the rate increase occurred or the factors currently used to determine the APR a new customer receives. For rate hikes imposed between Jan. 1, 2009, and Feb. 21, 2010, the issuer must consider the factors it currently uses for new customers for the first two rate evaluations, unless the rate increase was based on consumer-driven factors, such a decrease in credit risk.

The CARD Act doesn’t make the review process transparent to consumers. Issuers don’t have to provide notice to consumers if their rate isn’t lowered as a result of the review, according to Feddis.

What can you do? If your issuer won’t reduce your interest rate, shop around for a low-rate credit card.

To learn more about the new gift card provisions, read “Fed delays gift card rules.”

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