When President Obama signed the Credit CARD Act into law in 2009, the new legislation tasked the Federal Reserve with setting guidelines for "reasonable" penalties triggered by late payments. For many American families, missing a minimum credit card payment set off an avalanche of punishment. Late payment fees would exceed some cardholders' credit lines, kicking in overlimit penalties. Starting August 22, the new rules place strict restrictions on what banks can do when cardholders miss deadlines.
Late Payment Fees: Capped and Clearly Explained
Penalties still provide an essential incentive for cardholders to make minimum payments on time. However, the Credit CARD Act imposes a simplified penalty structure applicable to all major credit cards. If you've never made a late payment on your account, a credit card issuer can only charge a $25 late fee. However, the fee cap rises to $35 when you miss more than one payment in a rolling, six-month period.
Overlimit Fees: No More $39 Cups of Coffee
With credit cards accepted at convenience stores and coffee shops, more cardholders complained about small purchases that inadvertently caused them to exceed their credit lines. For instance, a $3 latte could trigger an overlimit penalty of $39 or more, depending on card issuers' policies. Even though some banks argued that cardholders bore responsibility for tracking their spending, policy makers agreed with consumer advocates who called the practice unfair. After August 22, card issuers can only charge a penalty no greater than the amount a charge took your account over the limit.
Inactivity Fees Abolished
Hoping to force cardholders to generate more interchange fees and interest, some credit card issuers imposed inactivity fees. Charging $20 or more for every month you don't make a purchase can force you to find something to buy with an otherwise dormant credit card. And when you're not in a habit of paying an account you keep just for emergencies, you're more likely to miss a payment. The Fed used its interpretation of the Credit CARD Act to abolish inactivity fees, and to force card issuers into streamlining penalties into a single monthly fee.