The Federal Reserve released new rules for credit cards that will take effect on August 22nd. These rules will limit certain fees and open up the possibility for interest rate decreases. However, the rules will likely crimp profits from credit card operations and potentially lead to stealth fees that will impact all consumers.
A cap on late fees is likely to have the largest impact on credit card companies. Presently, many credit card companies charge late fees of up to $39. Under the new rules, the largest late fee that can be levied is $25 unless a consumer has been late in the past six months. In those instances, the highest late fee can be $35.
A second change to late fees has to do with amount owed, as credit card companies can no longer charge late fees in excess of minimum payments. Thus, if a person who owes $15 pays late, the maximum late fee can only be $15.
The changes in penalty fees are likely to cause the most problems for banks. Late fees make up a substantial portion of credit card revenue. Without this revenue, credit card companies may be less likely to extend credit to people who are on the margins, as these consumers are the most likely to incur late fees.
An additional rule requiring banks to re-evaluate interest rate increases every six months and reduce interest rates within 45 days if appropriate is extremely vague and may have little impact on consumers or banks. However, if specific factors such as credit scores or debt to income ratios become required criteria, consumers may see some positive effects from this rule.
Also included in the new rules are requirements to eliminate inactivity fees and limit fees to one per infraction.
Ultimately, the implementation of these new rules will be yet another drain on the profitability of the credit card industry. To recoup this revenue, banks may tack on annual fees, reduce credit card rewards programs or, more stealthily, tack on an extra percentage point or two in interest to new cardmembers. Just as the CARD Act led to increased interest rates to a broad range of consumers, these new rules may lead to another round of increased expenses for credit card users.
-Jeffrey Weber
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