Credit Card Fees: The Fed’s Latest Proposal
In its ongoing efforts to protect consumers, the Federal Reserve rolled out a preliminary ruling that aims to limit credit card fees, particularly the troublesome over-the-limit fees which have received much media attention in the past few months. This rule, pending public comment, will go into affect on August 22 and will (hopefully) help curb some of the exorbitant fees attached to credit cards. Here’s a quick rundown:
Restriction of Over-the-Limit Fees
The proposed rule would make it unlawful for credit card issuers to charge over-the-limit fees greater than the overage amount. For example, if you went over your limit by $10, the resultant fee could not exceed $10. In the past, there was a flat fee for over-the-limit penalties – usually in the ballpark of $39+. So, in that case, a $3 latte charged to your maxed out card could actually wind up costing you much, much more. Additionally, credit card issuers won’t be able to charge multiple penalties on a single transgression.
The caveat: This rule won’t stop banks from charging 100% of your over-the-limit amount. So, if you accidentally charged $300 on a maxed out card, you could wind up paying $300 in fees (rather than the typical, much lower, flat rate). Whether banks will adopt this practice to make up for lost revenue on smaller over-the-limit penalties remains to be seen.
Inactivity Fees
Another provision of the new rule states that credit card companies won’t be able to charge inactivity fees. Inactivity fees have cropped up recently in response to the increased restrictions from the CARD Act.
The caveat: It’s all just semantics. An easy workaround is to waive the card’s annual fee if a cardholder meets a certain spending threshold. (Again, annual fees have already seen a big comeback post-CARD Act.) This, in essence, is the same thing as an inactivity fee. Credit cards that don’t already have an annual fee may see one soon, while others may see a hike. As expected, banking industry groups have expressed concern that increased regulation slims down profit margins, which means credit gets costlier for consumers, too (it trickles down). New fees would be the most logical way for these cots to be passed on.
Re-evaluation of Interest Rate Increases
The Fed rule also seeks to force credit card companies to re-consider any rate increases after 6 months. In a best case scenario, if you had your rate hiked because of a change in credit score, you’d be entitled to have it bumped back down once you cleaned up your act. But in practice, card companies will simply raise rates according to shifts in the credit market, which will give them a bit more discretion when it comes time to “re-evaluate.” More likely, though, we’ll continue to see cards gravitating to a variable interest rate, which can be shifted around almost arbitrarily.
Ongoing Negotiations and the Philosophy of Banking Regulation
These new rules are small steps towards a longer race towards credit and banking reform. Consumer protection and the role of the federal government remain a hotly contested issue in Congress, with the key players being Sen. Chris Dodd (D-Conn), chairman of the Senate Banking Commission and Sen. Bob Corker, a republican from Tennessee. The two are working on creating a bipartisan bill that will appease both camps.
The two warring philosophies are this: Dodd and left-leaning legislators believe there should be greater consumer advocacy in the banking industry while the opposition believes its more important to ensure that banks remain financially safe and sound (i.e. no more big bank failures). Looking back at the past few years, it’s hard to argue against either viewpoint. It comes down to the question of whether you’d rather cough up cash on unfair penalties and deceptive business practices or have billions of tax dollars go towards another massive bank bailout.
There is a consensus, however: the banking industry is broken. The compromise that our lawmakers reach on how to fix it will greatly affect the cost of credit, how we get credit and who can get it. But no matter what happens, the large role that personal fiscal responsibility plays is unlikely to diminish. A high credit score will always be better than a low one and it will always be risky to overspend and underbudget. Our advice: keep an eye on the changes on Capitol Hill, but don’t forget to invest long in your own creditworthiness.
How do you feel? What’s more important, consumer protection or keeping banks healthy and bailout-free? How important is personal finance in determining the fate of the credit and banking industry? Let us know your thoughts in the comments.
Image credit: paskaru76
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‘What’s more important, consumer protection or keeping banks healthy and bailout-free?’
Why is this contradictory? How the consumer can be protected, if the bank is not healthy? You accept your credit card with all terms and conditions, as a rational and responsible person you should know what, when and how to spend.