The much-discussed CARD Act has finally been
implemented, with the Federal Reserve approving rules that regulate
the level of fees credit card issuers can charge. The reforms are
being described as ‘the most sweeping overhaul of the industry
since the invention of credit cards’. John Hill


Photo of Federal Reserve Governor Elizabeth DukeThe Federal Reserve
Board has approved a final rule to protect credit card users from
unreasonable late payment and other penalty fees and to require
credit card issuers to reconsider interest rate increases imposed
since the beginning of last year.

“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
Governor Elizabeth Duke.

“Card issuers must also re-evaluate
recent interest rate increases and, if appropriate, reduce the

Kenneth Clayton, senior
vice-president and general counsel for ABA card policy, added: “The
rules adopted by the Federal Reserve today represent the final
phase of the broad-based rule changes mandated by the CARD Act.

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“With the new disclosure provisions
[mandated by the Federal Reserve but not covered by the CARD Act] set to take effect next month, this brings to a close the most
sweeping overhaul of the industry since the invention of credit
cards. Taken together, the new rules will provide consumers with
numerous tools for better management of their credit costs.

“Most customers handle their credit
cards responsibly, but bad behaviour by a relative few, such as
missing payments or exceeding credit limits, increases costs for
all customers. The rules adopted by the Fed today address so-called
‘penalty fees,’ and seek to ‘make the penalty fit the crime’, so
that simple missteps result in minor penalties, while larger or
repeated missteps can result in higher penalties.”

Clayton added: “These new rules
will provide greater protection, transparency and certainty for
credit card customers and the industry will work quickly and
diligently to ensure that they are implemented by their effective

According to a statement released
by the Federal Reserve, the act will affect issuers in several
ways. First and foremost it prohibits issuers from charging penalty
fees (including late payment fees and fees for exceeding the credit
limit) that exceed the lower of a $25 ‘safe harbour’ or the minimum
payment level. For example, card issuers would no longer be
permitted to charge a $39 fee when a consumer is late making a $20
minimum payment.

Table showing CARD Act, Instead, the fee could not exceed $20. However, the
fee can be higher if an issuer can demonstrate a higher cost or the
consumer engages in repeated violations such as being late again
over the next six month period (in which case the safe harbour cap
is increased to $35).

The regulations have come in
response to demands by the US congress that the Fed develop a
system for limiting credit card penalty fees as part of the larger
reforms passed in 2009 to help deal with the effects of global
economic crisis. According to a statement by the Fed, the average
late fee is $38 while the typical over-limit charge is $36.
Accordingly, in 2006 penalty fees have been reported to account for
10% of revenue for credit card issuers.

Other effects include banning
inactivity fees such as those based on the consumer’s failure to
use the account to make new purchases, preventing issuers from
charging multiple penalty fees based on a single late payment or
other violation of the account terms, and requiring issuers that
have increased rates since 1 January 2009 to evaluate whether the
reasons for the increase have changed and, if appropriate, to
reduce the rate.

This rule is the third and last
stage of the Credit Card Accountability Responsibility and
Disclosure Act of 2009 and will go into full effect on 22

According to the US government, US
consumers pay around $15bn in penalty fees every year, and the CARD
Act has been carried into law on a wave of pro-consumer pressure
amid anger over industry practices related to card fees and


Profit margins

But the industry, already reeling
from credit-related losses amid the global economic upheaval of the
past two years, says the new rules will hurt profit margins even
more, and make accessing credit more expensive for consumers.

In late 2009, US issuer JPMorgan
Chase warned that the CARD Act could result in it losing as much as
$750m, while Citigroup said that revenue lost from its US business
could amount to between $400m and $600m.

According to US payment consulting specialist RK Hammer, the
CARD Act could cost the industry as much as $5.5bn in lost revenue
in 2010 and more than $50bn by 2015.