Q&A: Can Credit Card Firms Charge an Inactivity Fee?

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Q: I noticed a small fee on my last credit card statement — on a card I rarely use. If I’m reading it right, it says I’m being charged for not using my card. I thought the CARD Act got rid of this type of nonsense? — L. Palmer from Yardley, Pa.

A: Well, yes and no.

The CARD Act does limit a lot of ways that credit card firms can charge users, especially in areas like late payment fees and how much interest they can charge. But credit card reform is a dynamic beast and federal regulators continue to tweak and adjust the new credit card rules.

The good news is that the “inactivity” fee that your card company charged you is high on the list of credit card carrier no-nos. In fact, the Federal Reserve, in amending parts of Regulation Z (under the Truth and Lending Act), is abolishing credit card inactivity fees starting Aug. 22.

That means companies like Citibank (Stock Quote: C), which charges some cardholders $60 of they don’t make $2,400 worth of purchases on their cards annually, won’t be able to do that anymore — and your credit card company (assuming it’s not Citibank) won’t be able to do it either. US Bank (Stock Quote: USB) is another culprit — it charges its card customers $40 if they don’t use their credit card for a year. That’s gone, too.

The Federal Reserve ruling not only takes care of inactivity fees, it addresses a host of other bothersome late fees. On June 15, the Federal Reserve issued a final rule that stops credit card carriers from slapping card customers with “unreasonable” late payment fees, along with some other guidance on credit card charges and interest rate hikes.

"The new rules require that late payment and other penalty fees be assessed in a way that is fairer and generally less costly for consumers," said Federal Reserve Governor Elizabeth A. Duke. "Card issuers must also reevaluate recent interest rate increases and, if appropriate, reduce the rate."

Here, from the Fed’s website, are the new rules and how they impact credit card customers. The rules, which tweak the Truth and Lending Act and the recently passed CARD Act, will:

  • Prohibit credit card issuers from charging a penalty fee of more than $25 for paying late or otherwise violating the account's terms unless the consumer has engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs it incurs as a result of violations.
  • Prohibit credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation. For example, card issuers will no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee cannot exceed $20.
  • Ban "inactivity" fees, such as fees based on the consumer's failure to use the account to make new purchases.
  • Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
  • Require issuers that have increased rates since Jan. 1, 2009, to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.

Again, each of these new rules goes into effect Aug. 22. To help consumers out, the Federal Reserve has a useful online guide to the new rules that goes into each of the above changes in greater detail.

So don’t worry about credit card inactivity fees. Those fees, along with some other unpopular fees, are on the way out — presumably to be replaced by other creative fees by card companies, if history is any guide.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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