What Is an Inactivity Fee?
The term inactivity fee refers to a service charge that banks and other financial institutions impose on their clients when there is no activity on their accounts. Inactivity fees are charged when certain accounts go dormant or when investors don't make any buy or sell orders in their brokerage accounts for a certain amount of time. These fees are legal and can be avoided by making at least one transaction per year or by closing the account altogether.
Key Takeaways
- An inactivity fee is a service charge imposed by a financial institution when there is no activity in a client's account during a specified time period.
- Banks may charge checking or savings account holders an inactivity fee if there are no deposits, withdrawals, transfers, or payments through their accounts.
- Brokerage and investment firms may require a minimum number of transactions per year or they may charge an inactivity fee.
- Consumers can avoid inactivity fees by conducting transactions or closing their accounts.
- Credit card issuers are limited as to how they can impose these charges since the passage of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009.
Understanding Inactivity Fees
Banks and other financial institutions charge their customers a variety of fees that contribute to their revenue. These fees, which are also called dormancy fees, include monthly maintenance fees, overdraft fees, foreign transaction fees, and inactivity fees. The latter are charged when customers stop using their accounts for any reason.
Banks charge inactivity fees for different types of accounts, including:
- Checking and Savings Accounts: As the name implies, these charges are imposed when these accounts show no customer-initiated activity. This means the account becomes dormant and may incur an inactivity fee if the account holder doesn't make any deposits, withdrawals, or transfers or has any automatic payments/debits from going through.
- Brokerage and Investment Accounts: The firms that offer these accounts make money from commissions on investor trades. When a customer makes infrequent trades, the brokerage doesn't make money from that customer. The broker can then try to compensate for the lack of commissions by charging inactivity fees. Smaller, passive investors who make a small number of trades are the most disadvantaged by inactivity fees.
The amount charged to consumers for inactive fees varies based on the type of account. Banks may charge a certain dollar figure for an inactive checking or savings account. On the other hand, firms may charge a percentage of the account balance for inactive brokerage or investment accounts,
The best way to avoid an inactive fee is to conduct a transaction, such as a deposit or trade, or to have an automatic bill payment or direct deposit go through the account. One other option is to close the account.
Accounts can go inactive after a minimum of six to 12 months with no activity. Some institutions may consider accounts to be completely dormant after 24 months or more.
Inactivity Fees and Credit Cards
Many credit card issuers charged inactivity fees to cardholders who didn't make any purchases within a certain period of time as specified in their terms and conditions. This practice became more difficult after the Credit Card Accountability, Responsibility and Disclosure Act of 2009 was introduced. This law banned companies from charging cardholders for not using their cards.
Cardholders had to make sure they used their cards periodically to avoid incurring charges when these dormancy fees were in effect. The time frame for considering an account inactive and assessing the fee depended entirely on the issuer. As with other accounts, the best way to avoid the inactive fee was to make a transaction. Closing the account, though would have been problematic for two reasons:
- Consumers who closed their accounts would no longer have access to a card for emergencies.
- It would have lowered their total available credit and, therefore, increased their credit utilization ratio, which may have led to a lower credit score.
Although the law mostly made dormancy fees illegal, card issuers can still charge consumers if there is no account activity for 12 months. 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.
Inactivity charges still apply to some unused or inactive electronic gift certificates, gift cards, and general-purpose prepaid cards.
Examples of Inactivity Fees
There are many banks that charge their customers inactivity fees when there is no activity that goes through their accounts. For instance:
- Alliant Credit Union charges a $10 fee on savings accounts when there is no activity within a 12-month period and if the account has deposits of $200 or less. Dormant fees are imposed on savings accounts that have no activity "within the period prescribed by applicable state law."
- Citizens Bank charges customers a $5 dormant account fee for accounts with a balance of $5,000 or less that don't receive any deposits or withdrawals during a 365-day period.
- Brokerage firm TradeStation charges investors an inactivity fee of $10 per month for equities and futures accounts if the account balance is less than $5,000. Traders can avoid this fee by making at least 10 trades during the previous 90 days.
Are Inactivity and Dormant Fees the Same?
The terms inactivity and dormant fees are often used interchangeably but they generally mean the same thing. These fees are charged by financial institutions when there is no activity in a customer's account. The guidelines about account activity vary by institution, account, and inactivity period. For instance, a bank may charge a dormant fee when a customer doesn't make any transactions in their savings account for a year while a brokerage firm may charge a monthly inactivity fee when traders don't execute a minimum number of trades.
What Is the Average Inactivity Fee?
Inactivity fees vary by account type and financial institution. The average monthly inactivity fee in the United States runs between $10 and $20. You can find information about the fee in your account's terms and conditions. Keep in mind that some issuers don't charge these fees while others may waive the fee if you meet certain conditions.
How Can I Avoid Being Charged an Inactivity Fee?
That depends on the type of account you have. The best way to avoid being charged an inactivity fee is to make a deposit, withdrawal, or other transaction from your checking or savings account. If you have a trading account, you may have to make a certain number of trades so you aren't charged a fee. In some cases, your financial institution may waive any fees if you hold a minimum balance in the account each month.
Be sure to read the terms and conditions of your account. If you're unsure about how to avoid them, talk to someone at your financial institution so you aren't paying any unnecessary fees.
The Bottom Line
Banks charge fees to their customers for a variety of reasons. You may be charged a fee if you don't maintain a minimum balance, if you overdraw your account, or if you fail to keep the account active. The latter is called an inactivity fee. You can avoid this type of fee by making regular transactions in the account or meeting certain criteria like maintaining a minimum balance.
As a seasoned financial expert with a wealth of knowledge in banking practices, fees, and regulations, I can shed light on the intricate details surrounding the concept of inactivity fees.
Inactivity Fees Defined: An inactivity fee is a charge levied by financial institutions, such as banks and brokerage firms, when there is no activity in a client's account over a specified period. This fee is a form of compensation for the institution, ensuring they generate revenue even if the client is not actively engaging with their services.
Diversity of Inactivity Fees: Financial institutions impose inactivity fees on various account types, including checking and savings accounts, as well as brokerage and investment accounts. Checking and savings accounts may incur inactivity fees if there are no customer-initiated activities like deposits, withdrawals, transfers, or automatic payments for a certain period.
Brokerage and investment firms, on the other hand, often require clients to make a minimum number of transactions per year. If investors fail to meet this criterion, the institution may charge an inactivity fee to compensate for the lack of commission on infrequent trades.
Legal Framework: It's essential to note that inactivity fees are legal, and financial institutions have the right to impose them. However, consumers can avoid these fees by conducting at least one transaction per year or by closing the account altogether.
Evolution in Credit Card Regulations: The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 significantly impacted the imposition of inactivity fees by credit card issuers. This legislation restricted credit card companies from charging cardholders for not using their cards. While dormancy fees are mostly illegal now, card issuers can still charge consumers if there is no account activity for 12 months, subject to clear disclosure and limitations.
Examples of Inactivity Fees: To illustrate, Alliant Credit Union imposes a $10 fee on savings accounts with no activity within a 12-month period and deposits of $200 or less. Citizens Bank charges a $5 dormant account fee for accounts with a balance of $5,000 or less that don't receive any deposits or withdrawals during a 365-day period. TradeStation, a brokerage firm, charges investors a $10 per month inactivity fee for equities and futures accounts with a balance below $5,000.
Inactivity vs. Dormant Fees: While the terms "inactivity" and "dormant" fees are often used interchangeably, they essentially denote the same concept. These fees are triggered when there is no activity in a customer's account, with variations in guidelines based on the financial institution, account type, and inactivity period.
Average Inactivity Fee and Avoidance Strategies: In the United States, the average monthly inactivity fee typically falls between $10 and $20, varying by account type and financial institution. To avoid being charged, clients can make regular transactions, meet specific criteria like maintaining a minimum balance, or refer to their account's terms and conditions for potential fee waivers.
The Bottom Line: In summary, financial institutions employ inactivity fees as a revenue-generating mechanism. Clients can navigate these fees by staying informed about account terms, engaging in regular transactions, and understanding the criteria for fee waivers. This knowledge empowers consumers to make informed decisions, ensuring their financial activities align with their preferences and objectives.
