Consumer-friendly credit card rules coming

[December 18, 2008]  WASHINGTON (AP) -- Consumers will be shielded from increases in interest rates on existing account balances on their credit cards under new rules being adopted by federal regulators.

The changes will allow credit card companies to raise interest rates only on new credit cards and future purchases or advances, rather than on current balances.

The new rules coming Thursday from the Federal Reserve and other banking regulators mark the most sweeping clampdown on the credit card industry in decades, aimed at protecting consumers from arbitrary hikes in interest rates or inadequate time provided to pay the bills.

Most of the rules were first proposed in May and drew more than 65,000 public comments -- the highest number ever received by the Fed. They also restrict such lender practices as allocating all payments to balances with lower interest rates when a borrower has balances with different rates.

But the changes also could make it more difficult for millions of people with bad credit to get what is known as a subprime card carrying higher interest rates, some experts say.

In addition, consumers will have to be given 45 days notice before any changes are made to the terms of an account, including slapping on a higher penalty rate for missing payments or paying bills late. Under current rules, companies in most cases give 15 days notice before making certain changes to the terms of an account.

The changes could cost the banking industry more than $10 billion a year in interest payments, according to a study by the law firm Morrison & Foerster.

Roughly 16,000 companies in the U.S. issue credit cards. The biggest lenders include Discover Financial Services LLC, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corp., American Express Co. and HSBC Holdings.

The American Bankers Association previously opposed the proposed rules as overly aggressive government intervention that would bring higher prices and constrict the supply of consumer credit. But in a statement issued Wednesday, the organization called them "strong regulations (that) will change the face of the marketplace, delivering an unprecedented level of consumer protection and empowerment in a time of economic uncertainty."

The new rules prohibit:

• Placing unfair time constraints on payments. A payment could not be deemed late unless the borrower is given a reasonable period of time, such as 21 days, to pay.

• Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account.

• Unfairly computing balances in a computing tactic known as double-cycle billing.

• Unfairly adding security deposits and fees for issuing credit or making it available.

• Making deceptive offers of credit.

Travis Plunkett, legislative director of the Consumer Federation of America, said customer frustrations run deep, as reflected in the comment letters submitted to the Fed.

Many of them "were spontaneous from consumers who feel they've been treated unfairly by their credit card companies and are literally begging the Fed for help," he said.

Many people acknowledged paying late, often mistakenly, and felt it was unreasonable for their card issuer to increase the interest rate on the balance, Plunkett maintained. Another common theme is struck by people who always pay on time but are hit with a rate increase because the company needed to recoup losses from other cardholders, he said.

Under the new rules, credit card lenders will be required to apply any payment above the minimum to the part of the balance with the highest interest rate.

The so-called subprime cards for people with low credit scores typically have no more than a $500 credit limit but require a large upfront fee.

The rules cap that fee at 50 percent of the credit limit and allow the cardholder to pay off the initial balance over a year, not immediately.

Consumer Federation estimates that credit card debt held by U.S. consumers is about $850 billion, some four times what it was in 1990.

[Associated Press; By MARCY GORDON]

Associated Press writer Carson Walker in Sioux Falls, S.D., contributed to this report.

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