Next Round of Credit Card Rules Curbs Fees

WASHINGTON (TheStreet) -- On March 3, the Federal Reserve proposed rules that aim to protect credit card users from unreasonable late fees and other penalties. The rule would also require credit card issuers to reconsider increases in interest rates.

The rule is tentatively set to take effect on Aug. 22, barring any changes that result from comments the Fed might receive during the next month. The rule is designed to curtail the rising fees and rates on the credit cards.

"The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year," said Federal Reserve Governor Elizabeth A. Duke.

The proposed rule would:

Ban inactivity fees: Some issuers, like Fifth Third Bancorp(FITB), have recently instituted an inactivity fee if there are no transactions on your credit card for a certain period of time. The proposed rule would stop issuers from requiring their cardholders to spend a certain amount of money to have annual fees waived, something Citigroup(C) is testing on its customers.

Force issuers to evaluate rate increases: At least every six months, credit card issuers must re-evaluate annual percentage rates increased on or after Jan. 1, 2009. In some cases, issues must reduce the annual percentage rate on certain accounts. This is most likely to happen when there are changes in consumers' creditworthiness, market conditions or the issuer's cost of funds.

Limit penalties: Stop credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation of the account terms. Card issuers would no longer be able to charge a $39 late fee for a $20 minimum payment. The fee could not exceed $20.

It would require credit card issuers to provide reasons for increases in rates. The rule would also prevent issuers from charging multiple penalty fees based on a single late payment or other violations.

Credit card issuers will need to make up revenue lost because of the new rules. Those changes could come in the form of new or increased fees.

There are two potential loopholes in the rules. For any rate increase imposed on or after Jan. 1, 2009, the proposed rule requires card issuers to review customers' financial states and, if necessary, cut their rates. However, the rule doesn't require the issuers to reduce the annual percentage rate to a specific level.