Inactivity Fee  and Example

Inactivity Fee and Example

An inactivity fee is a sum charged to investors who haven't engaged in any buying or selling activities in their brokerage accounts for an amount of time specified by the brokerage. However, the practice became more difficult after the introduction of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which mostly banned credit card companies charging consumers for not using their credit cards. Inactivity charges still apply to some unused or inactive electronic gift certificates, gift cards, and general-purpose prepaid cards. Unfortunately, the law doesn't extend to stock and options investors. Many credit card issuers previously charged an inactivity fee to credit card holders who hadn’t made any purchases in an amount of time specified under their terms and conditions. Until the Credit CARD Act of 2009 passed, credit card issuers could easily charge consumers for not using their credit cards. It was also problematic for consumers who did not want to close a zero-balance account because lowering their total available credit would increase their credit utilization ratio, possibly resulting in a lower credit score.

An inactivity fee is a sum charged to brokerage accounts that haven't met minimum buying or selling activity over a specific period.

What Is an Inactivity Fee?

An inactivity fee is a sum charged to investors who haven't engaged in any buying or selling activities in their brokerage accounts for an amount of time specified by the brokerage.

An inactivity fee is a sum charged to brokerage accounts that haven't met minimum buying or selling activity over a specific period.
Credit card issuers can only charge inactivity fees under certain circumstances.
Brokers can try to compensate for the lack of commissions by charging inactivity fees.

Understanding an Inactivity Fee

Many credit card issuers previously charged an inactivity fee to credit card holders who hadn’t made any purchases in an amount of time specified under their terms and conditions. However, the practice became more difficult after the introduction of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which mostly banned credit card companies charging consumers for not using their credit cards. Inactivity charges still apply to some unused or inactive electronic gift certificates, gift cards, and general-purpose prepaid cards.

Unfortunately, the law doesn't extend to stock and options investors. One of the ways brokerages make money is from the commissions on 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.

Inactivity Fee and the Credit Card Accountability, Responsibility And Disclosure Act Of 2009

Until the Credit CARD Act of 2009 passed, credit card issuers could easily charge consumers for not using their credit cards. When these dormancy fees were in effect, cardholders had to make sure to use their cards periodically to avoid incurring charges. Different issuers had different time frames for considering an account inactive and assessing the fee. During that period, the best way to avoid an inactivity fee would have been to close the account of the unused card. However, this posed a problem for consumers who wanted to have a credit card for emergencies. It was also problematic for consumers who did not want to close a zero-balance account because lowering their total available credit would increase their credit utilization ratio, possibly resulting in a lower credit score.

The Credit CARD Act mostly made dormancy fees illegal, but card issuers can still charge consumers if there has been 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.

Before signing up to a credit card, ask the issuer about inactivity fees, in addition to any other hidden charges that apply.

Example of a Broker Inactivity Fee

Popular online brokerage firm Interactive Brokers Group (IBKR) applies a $20 per month inactivity fee to accounts with balances less than $2,000 if clients don't generate at least $20 in commissions. The charge reduces to $10 for accounts with a balance of between $2,000 and $100,000 and that don't meet minimum monthly commissions of $10. Investors 25 and under must generate at least $3 in monthly commissions or pay the equivalent in activity fees.

Such charges are less likely to impact active traders who regularly buy and sell securities. However, inactivity fees can add up for investors who favor buy and hold strategies. Investors and traders can quickly compare inactivity fees via brokerage comparison sites.

Related terms:

Active Trading

Active trading is the buying and selling of securities or other instruments with the intention of only holding the position for a short period of time. read more

Brokerage Account

A brokerage account is an arrangement that allows an investor to deposit funds and place investment orders with a licensed brokerage firm. read more

Churning

Churning is excessive trading by a broker in a client's account in order to generate commissions. Discover more about the practice of churning here. read more

Commission

A commission, in financial services, is the money charged by an investment advisor for giving advice and making transactions for a client. read more

Credit Card Accountability, Responsibility, and Disclosure Act of 2009

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 is designed to protect card users from issuers' abusive lending practices.  read more

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.  read more

Impose

Impose refers to the act of placing a fee, levy, tax, or charge on an asset or transaction to the detriment of the investor. read more

Issuer

An issuer is a legal entity that develops, registers and sells securities for the purpose of financing its operations.  read more

Mergers and Acquisitions (M&A)

Mergers and acquisitions (M&A) refers to the consolidation of companies or assets through various types of financial transactions. read more

Over-Limit Fee

An over-limit fee is a penalty charged by credit card companies when cardholders’ purchases exceed their credit limit. read more