Understand the Application of Penalty Fees Under the Credit Card Act (USA)

As of August 22, 2010, new rules came into effect to restrict the ability of credit card providers to charge excessive penalty fees under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (known as the Credit CARD Act). While this is a good move aimed at protecting you, the responsibility for sensible credit card usage still rests with you, and it's important to understand both how the Act applies to you, and what you can do to keep your penalty fees under control.

Steps

 * 1) Understand what the new rules mean for your card usage. Penalty fees are capped or constrained under the new rules, to prevent excessive charges from being passed on to you. Penalty fees include late and over-the-limit fees.
 * 2) *Penalty fees will be capped at $25 for most customers.
 * 3) *Penalty fees will not be permitted to be any bigger than the minimum payment due.
 * 4) **This means that if you are late paying a $15 minimum payment on your card, the late fee cannot be any more than $15.
 * 5) **It also means that if you go over your limit on your credit card by, say $10, the over-the-limit penalty fee cannot be more than $10.
 * 6) *Multiple penalty fees cannot be charged for the same violation.
 * 7) *Inactivity fees are banned. This means that if you decided not to use your credit card, you cannot be charged for this inaction.
 * 8) Note that it is still possible to be charged higher penalty fees. This can occur where a consumer shows a "repeated" pattern of violations on very large minimum payments, or if the credit card issuer can show that charging a higher fee will offset its costs to chase up the violation that brought about the penalty.
 * 9) *If you are late or over your credit card limit two times in a period of six months, the card issuer can hike the second penalty fee to $35. If the card issuer can justify an even higher increase in the penalty rate to regulators, you risk an even higher rate.
 * 10) *For you, this means don't be a chronic late payer or over-spender of your limit. If you are, the bank still has plenty of leeway to charge you higher penalty fees.
 * 11) Be aware that the Credit CARD Act does not address interest rate hikes imposed on consumers who violate the terms of their credit card agreements. This means that if you spend over your limit, while your penalty fee is limited, you might receive a permanent penalty increase on your interest rate under the terms and conditions of your credit agreement. And, worse still, this will remain the interest rate for your future purchases.
 * 12) *Review the terms and conditions of your credit card provider to see what applies to you by way of interest rate penalty increases.
 * 13) Practice responsible credit card ownership. Credit cards are a great means to manage your money flow when used prudently and paid sufficiently, always on time. Credit cards let you earn bonus points and rewards, they give you the freedom to purchase when you need cash flow, and they allow you to "float" money for up to a month provided you're paying them up on time. Responsible credit card usage includes:
 * 14) *Paying at least the minimum balance on time. The $25 limit is still a lot to pay for something you could have done by paying the minimum amount on time. If you let this slip, say three times a year, that's $75 that could have been paying off debt, going into savings, or paying for something you'd rather enjoy.
 * 15) *Knowing your card limit and the extent that you've already charged it, at all times. This includes keeping track of regular payments that you've set up to be charged automatically.
 * 16) *Not falling into the mental trap of thinking you'll "get around to paying" a large lump sum down the road rather than paying the minimum amount by the due date required each month. If you don't pay up repeatedly, this can sufficient to represent a "pattern" of repeated violations but it also sets you up for a "pie-in-the-sky" attitude about owing money. If you can't pay it now, what makes it more likely that you can in a few months time?

Tips

 * In addition to the fee restrictions, card issuers have been asked to review the rate hikes that were put into place prior to the Credit CARD Act, which came into effect on February 22, 2010.
 * If you can't practice responsible credit card management, switch to a debit card until you're ready to try again. You won't get the same flexibility or rewards but you will get your financial limitations sorted.
 * While some members of the banking industry fear that capping the penalty fees will lead to less credit availability, some commentators believe that banks will simply find other ways to pass on more costs. Whatever the reality, the moral of the story is the same – watch out for your own financial interests by being a cautious and diligent credit card consumer.

Warnings

 * Late payments harm your credit score, even if you're not concerned about the penalties.
 * Credit card providers will tell you that you have the right to close an account if you don't like it. While true, this also means that you need to pay off the debt before it can be closed fully, and you might still take a credit score hit if things have gone wrong for you under that card. Don't rely on just closing the account when things get too hard; it's a false solution.

Things You'll Need

 * Credit card agreement details

Related Tips and Steps

 * How to Cut Up and Throw Away a Credit Card
 * How to Cut Credit Card Debt
 * How to Get a Credit Card when You Have a Low Income
 * How to Pay Off Credit Card Debt
 * How to Choose Your First Credit Card

Sources and Citations

 * CNN Money, New credit card restrictions take effect, http://money.cnn.com/2010/08/22/pf/credit_card_rules/ – research source
 * CBS Money Watch, Fed Approves New Credit Card Restrictions, http://moneywatch.bnet.com/economic-news/blog/daily-money/fed-approves-new-credit-card-restrictions/781/ – research source