NEW YORK — The Federal Reserve on Wednesday proposed strict limits on penalty fees and other charges that credit card companies can slap on customers for missteps such as late payments or going over credit limits.

The proposal outlines rules that would take effect on Aug. 22 as the third stage of credit card legislation signed by President Barack Obama last May. The majority of the new law took effect last week, and earlier provisions kicked in last August.

Among the biggest changes in the Fed proposal is capping penalty fees to no more than the dollar amount of the violation.

"A consumer who exceeds the credit limit by $5 should not be penalized to the same degree as a consumer who exceeds the limit by $500," the proposal states. If the rule is adopted, spending $5 over the credit limit would could incur no more than a $5 penalty.

Currently, most major credit card companies charge over-the-limit fees that average $39, even when the amount spent beyond the limit is just a few dollars. Consumer advocates have complained this can turn a $5 coffee into one that
costs $44.

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