Federal Reserve Reduces Credit Card Penalty Fees

The Federal Reserve issued new rules to cut penalties and other fees charged by credit card companies.

The changes, which take effect Aug. 22, reduce the penalty fees that credit card companies can charge customers who make late payments. While late payment fees today can be as high as $39, under the new rules the fee cannot be more than $25 unless one of the customer’s other previous six payments was late, in which case their fee may be up to $35, or the credit card company can show that the costs it incurs as a result of late payments justifies a higher fee.

In addition, a credit card company cannot charge a late payment fee that is greater than a customer’s minimum payment. Thus, if the minimum payment is $20, the customer’s late payment fee can't be more than $20. Similarly, if customers exceed their credit limit by $5, they can't be charged an over-the-limit fee of more than $5.

In addition, credit card companies can no longer charge customers inactivity fees, such as fees for not using their cards.

There is also now a one-fee limit. A credit card company cannot charge a customer more than one fee for a single event or transaction that violates their cardholder agreement. For example, customers cannot be charged more than one fee for a single late payment.

If a credit card company increases a card's annual percentage rate , it must explain why. Credit card companies also must now re-evaluate their rate increases. If a credit card company increases a customer’s APR, it must re-evaluate that rate increase every six months. If appropriate, it must reduce the rate within 45 days after completing the evaluation.

This set of rules is the latest in a series of regulations that implement the Credit Card Accountability, Responsibility, and Disclosure Act. For information on protections under the Federal Reserve's other credit card rules, read What You Need to Know: New Credit Card Rules Effective Feb. 22.

The new rules are an improvement over the $39 penalty fee that top credit card issuers routinely charge, according to the Center for Responsible Lending, but they could and should have been stronger. “The $25 limit is too high, and firms will have considerable leeway in justifying even higher amounts,” said the group. “Fed rulemakers also failed to limit interest-rate increases imposed as a penalty. And they made it easy for firms to make all rate hikes permanent, whether imposed as a penalty or not. That undermines a key CARD Act provision requiring firms to review rate increases every six months.”