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At last, hard limits on credit-card fees

Most penalty fees can't exceed $25 - or less if the cost of the infraction is smaller. If you're $5 over your credit limit, you can be charged a $5 penalty, but not a $30 penalty.

The Federal Reserve has finally issued rules limiting credit-card fees - one of its last steps in implementing the Credit CARD Act of 2009 - and they sound like a large step forward even if they're not perfect.

A key improvement will end this common, small-scale outrage: a $39 late fee for being a few hours late with a $20 minimum payment. Come August 22, your late fee in that situation will be limited to $20.  In the same way, you'll no longer face a $25 or $30 penalty for being $5 over your credit limit.  The new rule will limit the penalty to $5. Click here to see the Fed's description of the new rules.

In general, the new rules limit most penalty fees to $25, unless you're a repeat offender (if one of your last six payments was late) or if your card company "can show that the costs it incurs as a result of late payments justify a higher fee," the Fed says.

And the Fed has laid the groundwork for dealing with another credit-card frustration: Rates that go up and stay up. Under the new rule, the Fed says, "if your credit card company increases your APR, it must re-evaluate that rate increase every six months. If appropriate, it must reduce your rate within 45 days after completing the evaluation."

Are the new rules perfect? Not according to Michael Calhoun, president of North Carolina's Center for Responsible Lending, says the Fed "didn't go far enough to curtail widespread abuse" in fees that are unrelated to issuer losses. Instead, Calhoun calls them "just another way to raise costs for credit card customers."  He also says the new rule undercuts the value of that six-month rate re-evaluation:

These rules are an improvement over the $39 penalty fee top credit card issuers routinely charge, but they could and should have been stronger. The $25 limit is too high, and firms will have considerable leeway in justifying even higher amounts. Fed rulemakers also failed to limit interest-rate increases imposed as a penalty. And they made it easy for firms to make all rate hikes permanent, whether imposed as a penalty or not. That undermines a key CARD Act provision requiring firms to review rate increases every six months.

For now, I'm seeing the glass as half-full, since the new rules are light years ahead of where we were before the Fed and Congress finally recognized the need to impose any rules on the card companies' Wild West business model.  But I agree with him on this point: "The actions today are another example of why the consumer financial protection agency that Congress is almost finished crafting is so important."

The key to consumer protection is the ability to respond quickly as market conditions and business models change.  As the financial collapse  made abundantly clear, today's "financial innovation" can too easily become tomorrow's consumer trap.