Most credit card penalties will be limited to $25, and fees for customers who don’t use their cards will be eliminated under rules released Tuesday by the Federal Reserve.
The Fed also ordered a review of all credit card interest rate hikes imposed since January 2009, including most of the record increases that came in the wake of a nationwide cutback on credit.
The rules, which implement a final set of changes that Congress passed in May 2009, take effect Aug. 22.
“The Federal Reserve’s guidelines issued today are great news for consumers,” said Rep. Carolyn Maloney, D-N.Y., one of the authors of the credit card laws.
The Fed’s rules could result in lower interest rates for consumers. Banks will be required to reconsider the reasons for hikes that kicked in over the past 18 months. They would have to reduce rates if the reasons for the increases no longer exist, and regulators will review and enforce such cuts.
Consumers will most immediately notice the new penalty fee limit of $25. Reducing penalty fees was a central provision of the credit card law, but Congress left it to the Fed to determine how to do it.
The Fed leaves room for larger penalty fees to be charged if a consumer has shown a pattern of “repeated” violations or if a card issuer can show that a higher fee reasonably offsets its own costs in dealing with the violation that spurred the penalty.
Other parts of the new rules:
Consumers won’t have to fear being charged a fee for failing to use their credit cards.
Penalty fees can’t exceed the dollar amount incurred by the consumer’s violation that spurred the fee. For example, if a customer is late making a $20 minimum payment, the fee can’t exceed $20. A consumer who exceeds her credit limit by $5 cannot be charged an over-the-limit fee of more than $5.
Consumers will no longer face multiple penalty fees, if the violation was based on a single late payment.
The provisions announced Tuesday by the Fed complement previous rules implementing the 2009 credit card law that are already in effect.
Starting in February, issuers were prohibited from hiking interest rates on existing balances as long as customers paid their bills on time. They also have to notify customers at least 45 days in advance of interest rate increases and most fee changes.
The Fed was tasked with figuring out a way to set penalty fees in a way that’s “reasonable and proportional” to the violation that caused the fee.
Consumers scored a win, since these fee caps go beyond what the Fed had suggested earlier this year in a draft. The $25 limit will mean significant savings for consumers who face median penalty fees of $39, according to data collected by the Pew Safe Credit Cards Project.
However, if a cardholder is late or over his credit limit two times within six months, issuers could hike the second penalty fee to $35, or possibly more if the issuer can justify the fee to regulators, according to the Fed rules.
Although the Fed is cracking down on penalty fees, it hasn’t addressed the interest rate hikes that are also imposed on consumers who violate the terms of their credit card agreements.
So a consumer who spends more than his credit card limit by $15 may only face a $15 fee. But that consumer could still face a permanent penalty hike on his interest rate, which would apply to any future purchases.
Still, some banking groups have concerns. Financial Services Roundtable’s senior lobbyist Scott Talbott warned that the Fed’s cap on penalty fees will limit the industry’s ability to offset the risk that credit cardholders don’t pay their bills.
“The restrictions in the rules the Fed issued will decrease the ability of the credit card industry to price for risk and the net effect will be a decrease in [credit] availability,” Talbott said.
