The Federal Reserve Board should use "common sense" when defining "reasonable and proportional" penalty fees under the new credit card law, Pew Charitable Trusts said Tuesday.

President Obama signed the Credit Card Accountability, Responsibility, and Disclosure Act last year. The law is taking effect in three phases, the second of which will begin next week.

The third phase, set to take effect in August, will require that penalty fees for paying late or charging over the limit be "reasonable and proportional to such omission or violation." The Fed is to set standards under this section of the law in a forthcoming rule.

Pew urged the Fed to restrain the size of penalties, relative to the amount past due; set limits on how high penalty interest rates can climb and how long they can apply; and ban "hair-trigger" late fees.

"Americans are being charged excessive penalties for exceeding their credit limits by even one dollar," said Nick Bourke, manager of Pew Safe Credit Card Project, said in a press release. "A $39 fee for exceeding a credit limit by just a few dollars, or for missing a $70 minimum payment deadline by a few hours, is difficult to justify as 'reasonable' or 'proportional.' "

The nonprofit also advocated banning overlimit fees, which several issuers have already stopped charging.

Pew said the CARD Act will save consumers "billions" by clamping down on industry practices; retroactive rate hikes and easily triggered penalty rates alone cost them at least $10 billion a year, the nonprofit said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.