In its ongoing efforts to protect consumers, the Federal Reserve rolled out a preliminary ruling that aims to limit credit card fees, particularly the troublesome over-the-limit fees which have received much media attention in the past few months. This rule, pending public comment, will go into affect on August 22 and will (hopefully) help curb some of the exorbitant fees attached to credit cards. Here’s a quick rundown:

Restriction of Over-the-Limit Fees

The proposed rule would make it unlawful for credit card issuers to charge over-the-limit fees greater than the overage amount. For example, if you went over your limit by $10, the resultant fee could not exceed $10. In the past, there was a flat fee for over-the-limit penalties – usually in the ballpark of $39+. So, in that case, a $3 latte charged to your maxed out card could actually wind up costing you much, much more. Additionally, credit card issuers won’t be able to charge multiple penalties on a single transgression.

The caveat: This rule won’t stop banks from charging 100% of your over-the-limit amount. So, if you accidentally charged $300 on a maxed out card, you could wind up paying $300 in fees (rather than the typical, much lower, flat rate). Whether banks will adopt this practice to make up for lost revenue on smaller over-the-limit penalties remains to be seen.

Inactivity Fees

Another provision of the new rule states that credit card companies won’t be able to charge inactivity fees. Inactivity fees have cropped up recently in response to the increased restrictions from the CARD Act.

The caveat: It’s all just semantics. An easy workaround is to waive the card’s annual fee if a cardholder meets a certain spending threshold. (Again, annual fees have already seen a big comeback post-CARD Act.) This, in essence, is the same thing as an inactivity fee. Credit cards that don’t already have an annual fee may see one soon, while others may see a hike. As expected, banking industry groups have expressed concern that increased regulation slims down profit margins, which means credit gets costlier for consumers, too (it trickles down). New fees would be the most logical way for these cots to be passed on.

Re-evaluation of Interest Rate Increases

The Fed rule also seeks to force credit card companies to re-consider any rate increases after 6 months. In a best case scenario, if you had your rate hiked because of a change in credit score, you’d be entitled to have it bumped back down once you cleaned up your act. But in practice, card companies will simply raise rates according to shifts in the credit market, which will give them a bit more discretion when it comes time to “re-evaluate.” More likely, though, we’ll continue to see cards gravitating to a variable interest rate, which can be shifted around almost arbitrarily.

Ongoing Negotiations and the Philosophy of Banking Regulation

These new rules are small steps towards a longer race towards credit and banking reform. Consumer protection and the role of the federal government remain a hotly contested issue in Congress, with the key players being Sen. Chris Dodd (D-Conn), chairman of the Senate Banking Commission and Sen. Bob Corker, a republican from Tennessee. The two are working on creating a bipartisan bill that will appease both camps.

The two warring philosophies are this: Dodd and left-leaning legislators believe there should be greater consumer advocacy in the banking industry while the opposition believes its more important to ensure that banks remain financially safe and sound (i.e. no more big bank failures). Looking back at the past few years, it’s hard to argue against either viewpoint. It comes down to the question of whether you’d rather cough up cash on unfair penalties and deceptive business practices or have billions of tax dollars go towards another massive bank bailout.

There is a consensus, however: the banking industry is broken. The compromise that our lawmakers reach on how to fix it will greatly affect the cost of credit, how we get credit and who can get it. But no matter what happens, the large role that personal fiscal responsibility plays is unlikely to diminish. A high credit score will always be better than a low one and it will always be risky to overspend and underbudget. Our advice: keep an eye on the changes on Capitol Hill, but don’t forget to invest long in your own creditworthiness.

How do you feel? What’s more important, consumer protection or keeping banks healthy and bailout-free? How important is personal finance in determining the fate of the credit and banking industry? Let us know your thoughts in the comments.

Image credit: paskaru76

Related posts:

1. 20 Common Credit Card Fees to Watch Out For!
2. Defeat Overdraft Fees and Debit Card Trickery Using Credit Card Smarts
3. Debit Card Purchases Triggering Overdraft Fees

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“Awesome and fun OR awful and suicidal?” Tim asked.

A user-generated video contest based on “Pants on the Ground” and Move Your Money?! I called him almost immediately, saying “do it…it’s a great idea!”

I’m sure I had nothing to do with his decision (his intuition about things like this is vastly better than mine), but he went live with his contest the very next day.

Six days later? Crickets. No entries. Very little discernible buzz.

“Fruitcake!” I thought. I had emphatically encouraged a good friend to launch a dud.

I panicked, and decided to create a video so he would have at least one submission. I studied the “Pants on the Ground” lyrics, modified them to fit the contest rules, and recorded a Credit Union Warrior version of “Money in the Bank” (complete with falsetto background vocals that will make you either laugh or hurl). I threw together a video to go with the song, and became the first entry in the contest…almost my apology for leading Tim astray.

It just goes to show you how crazy our expectations and levels of patience have become. The contest was a great idea, and (despite what I feared) there was significant buzz. Deciding whether or not to enter a contest takes time. Creating content takes time. Often, when you launch a thing like this you lose sight of those important points.

Within weeks, the Money in the Bank contest had received 14 entries…all of them packed with personality, energy, and even some catchy tunes. Two videos were posted on the very popular Move Your Money blog, tens of thousands of people visited YoungFreeHQ.com, and the participants had a blast.

Being remarkable sometimes means risking “looking like a fool.” Currency Marketing is remarkable.

Voting starts today. Make sure you exercise your civic duty.

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There were no words minced when the credit card companies let the world know that it’ll be tough for them to be so generous in the post-CARD Act era. And now, they’ve followed through. Our rewards cards aren’t quite so rewarding anymore, with cashback rates slipping from all time highs of 3% to an average of 1.25% and the annual fee making a comeback So, with the standards slipping, is it still worth it to try to rack up rewards points for free loot?

Well, it depends.

Determining whether a rewards credit card is a good deal mostly has to do with your own situation and spending habits. With that in mind, ask yourself these questions in order to decide if a rewards credit card is worth it.

Do the benefits outweigh the costs?

This is an easy one. Take a look through the rewards you’re likely to earn and compare it to the annual fee. Are you paying a $199 annual fee for the chance to earn a free night in a hotel worth $100? Then skip it.

Of course, when you’re trying to decide between two cards, the equation gets a little bit trickier. For example, let’s say card A has rewards but a higher interest rate plus an annual fee while card B has no rewards, a lower interest rate and no annual fee. Ask yourself: If I carry a balance on the higher interest card, will the rewards I receive exceed the amount I’d save if I went with a lower interest credit card?

To help you get a big picture perspective, do a true apples-to-apples comparison. Tally up those fees and run through a scenario where you carried a balance throughout the year by punching in some numbers into a credit card calculator.

Will I have to change my spending habits?

Ever see an offer and think, “Wow! I could earn 20,000 points instantly? But wait, I never shop at SuperWarehouseGoodsstore.com…” That’s a sign of a bad deal. You shouldn’t have to change where or how much you spend based on the possibility of earning rewards. When it comes to deciding where to spend your money, you should base your decision on your needs, your budget and where you see the most value without considering rewards. Chasing rewards points to obscure merchants and upsells is a highly inorganic way to manage your personal finances and will likely lead to a closet full of junk you don’t actually want or need and some consolation prize that is worth less than the money you blew on random purchases.

Let the rewards come to you. Choose a rewards card that matches your lifestyle and spending habits. Drive cross country every weekend for a rendezvous with your long distance heart throb? Get a card that rewards gas purchases. Saving up for a honeymoon? Get a Sandals Rewards Card that goes towards an all inclusive vacation. Love to travel but hate United Airlines? Skip the Visa Mileage Plus and grab the Visa Rapid Rewards for Southwest.

Can I get these savings elsewhere?

Consider this: a $25 gift card for Damon’s Grill from a certain rewards card program costs 2,500 points. Now, if you’re earning 1 point for every dollar you spend, you’re essentially spending $2,500 to save $25 on some baby back ribs. That’s about the same as cashing in a 1% discount coupon.

There are more ways to save money than through credit card rewards. Coupons, promotions, membership cards and good ol’ fashioned frugality are a few of them. And if you think about it, these methods aren’t much different than rewards programs. For example, a credit card rewards program has you shelling out $200 a year for the opportunity to rack up points, while buying a coupon book like the Entertainment Book has you forking over $20 for hundreds of coupons for restaurants, shopping, travel, etc.

How many points will I likely earn?

This is another easy bit of math. Take a look at your credit card statements from the previous year and find out how much you spent on average. Now, plug that number into the rate at which you’d earn rewards. You might be surprised at how little you actually spend and thus how little rewards you actually get – especially if you’re only getting 1 point for every dollar you spend. Either see what else is out there (check out billshrink.com for credit card comparisons) or just get a normal, low interest rate, low fee card.

All in all, it’s clear that getting rewarded by rewards cards isn’t as easy as it used to be. For some, it’s still a lucrative venture (i.e. big spenders who qualify for the luxury credit cards that banks are now pushing). But for most of us, there are better avenues for saving money than rewards cards. Take time to crunch the numbers and think realistically about your spending before you go chasing after elusive free stuff.

Image by hermanturnip.

Related posts:

1. How much is your loyalty worth?
2. Are Credit Card Rewards Really All That?
3. Don’t fall into the ‘Rewards Trap’