Fed Approves New Credit Card Restrictions

(MoneyWatch)  Credit card late fees and other nuisance charges will be limited under new rules issued by the Federal Reserve Board yesterday. The new regulations go into effect on August 22; they are part of the Fed's continuing efforts to implement the Credit Card Accountability Responsibility and Disclosure Act of 2009, otherwise known as the Credit CARD Act.

Under the rules, late fees for most customers will be capped at $25, and they won't be allowed to be any bigger than the minimum payment due. Issuers will still be able to charge higher penalty fees for chronic late payers or those who are late on very large minimum payments. The new rules also ban inactivity fees.

The Fed also asked issuers to "review" the rate hikes they started piling on last year in advance of the CARD Act, which started going into effect on February 22, 2010.

This is all good news for consumers, but every time Washington changes the rules, the card issuers figure out new ways around them, so you still have to watch how you use your plastic. A few pointers:

• Don't carry balances. The Fed's new requirement that issuers lower fees "if appropriate" lacks teeth. How many banks or other issuers will think a rate change is appropriate for them? The average rate now is 16.81 percent, according to comparison site Index Credit Cards. Furthermore, most card interest rates are variable and linked to market rates such as the prime rate. Those rates are near record lows and can be expected to spike once the economy strengthens. There's no good way around this, cardholders. And the new balance transfer deals aren't as generous as those in the past. Pay off your balances before you get buried in interest costs.

• Don't be late. Even with new limits on late fees, it's not good to get behind on your payments. A small late fee (and $25 isn't nothing) is still a waste of money. Late payments will hurt your credit score and that, in turn, will cost you more on everything you borrow.

• Do keep using your credit cards instead of debit cards for everyday purchases. A debit card can throw your checking account into at least temporary disarray if it gets stolen, and you can still pile up one overdraft fee on top of another if you accidentally go over your bank balance several times with an afternoon of small purchases (the Fed did issue rules to prohibit that back in February that go into effect July 1). Credit cards typically provide more rewards than debit cards, and you can 'float' your money for almost a month by charging regular purchases instead of having them immediately pulled from your checking account. Of course, this advice only applies if you're a steadfast follower of Rule No. 1 and you pay off your balance in full every single month. If you can't do that, then use the debit card or pay cash; doing the latter might just confuse the cashier.

Photo by Paalia on Flickr.
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