Although the Credit CARD Act of 2009 has landmark protections against rate hikes on outstanding balances, the Federal Reserve needs to go further in protecting consumers against unfairly high penalty fees, according to Pew Charitable Trusts.
Pew is an independent nonprofit organization that advocates improved public policy and consumer education. Its Pew Safe Credit Cards Project has examined unfair credit card practices since the reform law’s enactment in May 2009.
Pew is now looking toward August when the reform legislation’s final batch of provisions takes effect, primarily broader restrictions on penalty fees.
In the coming months, the Fed will issue a final rule that defines “reasonable and proportional” penalty fees, according to the Fed’s mandate under the Credit CARD Act. But “reasonable and proportional” is vague and open for interpretation by card issuers, consumer advocates have argued.
Pew’s latest research shows that the median penalty fee for late payments is $39 and the median penalty “annual percentage rate” (APR) is 28.99 percent.
“This type of penalty pricing can cause significant financial harm to credit card holders,” Pew stated.
Pew gave the following example: A cardholder with a balance of $3,000 will have a minimum monthly payment of about $69. If the consumer “falls into penalty status” they will be hit with higher interest rates and fees, which may raise the minimum payment by 104 percent — to $141.
“We are seeing instances where Americans are being charged excessive penalties for exceeding their credit limits by even one dollar.
A $39 fee for exceeding a credit limit by just a few dollars, or for missing a $70 minimum payment deadline by a few hours, is difficult to justify as ‘reasonable’ or ‘proportional’ under the factors identified in the new law,” said Nick Bourke, manager of the Pew Safe Credit Cards Project.
Pew estimates that retroactive interest rates and “hair-trigger” penalty APRs – two practices either banned or heavily restricted with the reform laws starting Monday – are costing U.S. consumers at least $10 billion a year.
Here are the Credit CARD Act’s fee-related provisions that are taking effect Monday:
- Credit card companies are required to obtain permission from the consumer before charging fees for transactions that exceed the credit limit.
- If a consumer “opts-in” to allowing transactions that go over the credit limit, your credit card company can impose only one fee per billing cycle. The opt-in can be revoked at any time.
- If your credit card company requires you to pay fees (such as an annual fee or application fee), those fees cannot total more than 25 percent of the initial credit limit. For example, if your initial credit limit is $500, the fees for the first year cannot be more than $125. This limit does not apply to penalty fees, such as penalties for late payments.
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