What Is a Dormancy Fee?
A dormancy fee, also known as an inactivity fee or inactivity charge, isa penalty imposed by a bank or other financial institution when a customer hasn't made a transaction on a particular account for a certain period of time. Dormancy fees are no longer allowed on credit cards in the United States, but can still be found on other payment cards, such as gift cards, and other types of financial accounts.
Key Takeaways
- Banks and other financial institutions can charge dormancy fees if a customer's account has been inactive for a certain period of time.
- Dormancy fees are no longer allowed on credit card accounts.
- Dormancy fees can still exist on certain other types of cards, such as gift cards and prepaid cards, as well as bank, credit union, and brokerage accounts.
Dormancy Fees and Credit Cards
Dormancy fees were once one of the many fees that credit card issuers were allowed to impose on their customers.
However, changes to Regulation Z of the Truth in Lending Act outlawed them in the U.S. in 2010.
The updated rules also made a number of other changes to the law, including setting new limits on credit card late payment fees and prohibiting issuers from imposing multiple penalty fees based on a single late payment.
In addition to putting the end to an annoying penalty, the current rules on dormancy fees made it easier for consumers to build and maintain their credit scores by keeping accounts open even if they rarely or never use that particular card.
One of the major factors that's used in calculating credit scores is an individual's credit utilization ratio. That's how much revolving debt (such as credit cards) they have outstanding at a given point as a percentage of all the credit they have available to them. Lenders generally like to see a credit utilization ratio of 30% or less, and the lower, the better. So keeping a credit account open—and preserving its available credit line—can be advantageous.
Similarly, credit scoring models look at the age of a person's credit accounts, with older being better. So maintaining longtime accounts can be beneficial.
Card issuers still have the right to close a credit card account if it has been inactive for a period of time or for any other reason. One way consumers can prevent this from happening is to make at least a small charge periodically on each of their cards. However it's often in issuers' best interest to keep an account open in case the customer resumes using it and they can start collecting merchant transaction fees and interest again.
Dormancy Fees on Gift and Prepaid Cards
The dormancy fee rules on gift cards, gift certificates, and general purpose prepaid cards are not quite as consumer friendly as those for credit cards, although they do provide some protections.
Specifically, issuers cannot impose a penalty until the card or certificate has been inactive for at least one year.
In addition, the Consumer Financial Protection Bureau says, the card or certificate must "clearly and conspicuously" state that it has a dormancy fee, how much that fee is, and how often it may be imposed. Issuers aren't allowed to charge more than one dormancy fee in a calendar month.
Dormancy Fees on Bank, Credit Union, and Brokergage Accounts
Under federal law, both banks and credit unions can impose dormancy fees on inactive accounts, but they must disclose them when the account is opened.
These financial institutions have some discretion in deciding when an account is inactive, although the individual states, which regulate certain kinds of banks and credit unions, can also have their own rules.
Customer accounts that are inactive for a period of time may also be at risk of escheatment, a process in which assets considered to have been abandoned are turned over to the state. Again, these rules can vary from one state to another.
Brokerage firms can also impose inactivity fees on account holders who have not conducted any transactions for a certain period.
What Fees Can Credit Cards Still Charge?
While the federal Credit Card Accountability, Responsibility, and Disclosure Act, or CARD Act, of 2009 and other recent regulations cracked down on many kinds of credit card fees, they didn't do away with them altogether. Among the most common credit card fees today are annual fees, late payment fees, cash advance fees, balance transfer fees, and foreign transaction fees.
Not every card charges all of these, and you can avoid many of them by shopping around. For example, cards with no annual fee are widely available, and many cards that cater to frequent travelers don't charge foreign transaction fees. However, a card that doesn't charge a particular fee may make it up in other areas.
According to the Consumer Financial Protection Bureau, late fees alone cost American consumers some $12 billion a year.
What Fees Do Debit Cards Charge?
Debit cards have their own set of fees, although the list is shorter than it is with credit cards. Common debit card fees can include monthly maintenance fees, ATM fees (typically for using your card at out-of-network ATMs), and foreign transaction fees. As with credit cards, you can avoid many of these fees by choosing the right debit card.
What Fees Do Prepaid Cards Charge?
Prepaid cards, which act like debit cards but are preloaded with money rather than linked to a bank account, are also subject to an assortment of fees. Those can include monthly fees, transaction fees, ATM fees, foreign transaction fees, cash reload fees, and balance inquiry fees. They can also charge dormancy or inactivity fees after a certain period of time.
What Fees Do Gift Cards Charge?
The purchaser of a gift card typically has to pay a card issuance fee. The card's recipient may also be subject to fees, including monthly maintenance fees, transaction fees, reload fees, and cash-out fees.
The Bottom Line
While dormancy fees are no longer allowed on credit cards, they still exist on other types of financial accounts. You can often avoid them—and other types of fees—by shopping around.
