The Federal Reserve Board approved a final rule on Tuesday that will cap late fees on credit card payments and ban "inactivity" fees.
"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 Gov. Elizabeth Duke. "Card issuers must also re-evaluate recent interest rate increases and, if appropriate, reduce the rate."
The Fed's rules prohibit credit card issuers from charging a penalty fee of more than $25 to consumers for paying their bill late. It also stops issuers from charging penalty fees higher than the amount owed by the consumer.
For example, the Fed said card issuers could not charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee could not exceed $20.
Credit card companies that have increased their rates since Jan. 1, 2009, will also be required to evaluate whether reasons for the increase have changed and to determine whether those rates should be reduced.
The final rules also provide card issuers the opportunity to prove to the Fed that any penalty fees they choose to charge above the $25 cap are "reasonable and proportional" to the issuer's actual costs for violation of the account terms.
In its 252-page rule, the Fed clarified variables issuers may consider in determining the true cost of penalty fees, if they choose to do so.
The central bank said its data showed that most account-term violations did not actually result in card-issuer losses.
"While issuers generally conceded that most violations to not result in losses, the cost associated with those that do is extremely high," it said.
The rules will go into effect Aug. 22.
