What Is a Dormancy Fee?
A dormancy fee was a penalty charged by a credit card issuer to a cardholder’s account for not using the card for a certain period of time. Dormancy fees, also called inactivity fees, are no longer allowed in the United States under the Credit CARD Act of 2009. However, credit card issuers are allowed to cancel a cardholder's account for inactivity of a year or longer.
Understanding Dormancy Fee
Dormancy fees required that cardholders use their cards or accounts periodically to avoid incurring fees. Regular consumer usage of credit cards, therefore, was in the best interest of the issuer. This rule often resulted in cardholders carrying a balance on their card, for which they need to pay interest. Charging dormancy fees created a nuisance for cardholders who wanted to have a credit card solely for emergencies.
Dormancy fees also posed a problem for consumers who didn’t want to close a zero-balance account because lowering their total available credit would increase their credit utilization ratio and possibly result in a lower credit score. Different issuers had different timeframes for considering an account inactive and assessing the fee.
Dormancy fees were applied to bank accounts and gift cards that had not been used for a certain amount of time, as well. The Credit CARD Act also created limitations for these types of dormancy fees.
Fees Still Allowed Under the Credit CARD Act
Dormancy fees still apply to some unused or inactive electronic gift certificates, gift cards, and general-purpose prepaid cards. Issuers may still charge a dormancy fee on these cards if there has been no account activity for 12 months. However, the issuer must disclose the existence, frequency, and amount of these fees conspicuously before the card is issued and must not charge them more than once per month.
Issuers can charge a one-time initial issuance fee on electronic gift certificates, gift cards, and general-purpose prepaid cards, but they cannot charge a periodic service fee for the privilege of holding such a card.
Banks and credit unions still can charge account holders a monthly inactivity fee. However, this fee and the activity requirements to avoid it needs to be clearly outlined in the terms and agreements acknowledged and signed by the account holder.
The best way for consumers to avoid dormancy fees on bank accounts, electronic gift certificates, gift cards, and prepaid cards is to read all fine print carefully before purchasing a prepaid card or a gift card, or opening a bank account.