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Extra12/18/2008 4:05 PM ET

Feds ban 'unfair' credit card rules

Starting in July 2010, consumers will get a big blanket of protection. But banks claim that the cost -- about $10 billion a year -- will ultimately hurt consumers.

By MSN Money staff with wire reports

Federal regulators have adopted sweeping new rules for the credit card industry that will shield consumers from arbitrary increases in interest rates and inadequate time to pay the bills, among other changes.

Credit card companies will be allowed to raise interest rates only on new credit cards and future purchases or advances, rather than on current balances.

The changes, which take effect in July 2010, mark the most sweeping clampdown on the credit card industry in decades. They were approved this morning by the Office of Thrift Supervision, a Treasury Department division. The Federal Reserve and the National Credit Union Administration were expected to act on them later in the day.

John Reich, the thrift agency's director, said the rules "will enhance public confidence in financial institutions and establish a level playing field for institutions that want to do business fairly without suffering competitive disadvantages."

The rules also restrict such lender practices as allocating all payments to balances with lower interest rates when a borrower has balances with different rates.

They 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.

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.

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 missed or late payments. Under current rules, companies in most cases give 15 days' notice before making certain changes to the terms of an account.

Consumer advocates praised the reform efforts, if not their timing.

"It's too bad the Fed is giving issuers so much time to comply with rules that should have been adopted years ago," said MSN Money columnist Liz Pulliam Weston, the author of three books about credit and debt.

She said credit card issuers shot themselves in the foot this year by making blanket, arbitrary changes to the accounts of some of their best customers. Issuers doubled and tripled interest rates and chopped lines of credit not just to high-risk borrowers, but to people who always paid on time and who had good credit.

"Their actions just brought home to millions of consumers how capricious and unfair the credit card industry had become," Weston said.

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

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

The head of the American Bankers Association called the changes "strong new regulations . . . (that are) unprecedented in their scope and signal the beginning of a new market structure for credit cards."

"While the new rules are designed to increase protections for consumers, the Fed itself has recognized that they may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history," ABA President and Chief Executive Edward Yingling said in a statement. "With the uncertainty facing our financial system, it's absolutely vital for policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace."

Consumer frustrations run deep

Peter Pham, CEO of consumer Web site Bill Shrink, put it more plainly: "Credit card companies will have to change the way they have been doing business and unfortunately, probably raise fees to make up for the lost revenue."

The site allows people to look up individual credit cards to see if they meet the new guidelines.

Most of the rules were first proposed in May and drew more than 65,000 public comments -- the most ever received by the Fed.

Travis Plunkett, legislative director of the Consumer Federation of America, said 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."

Many people acknowledged paying late, often mistakenly, and felt it was unreasonable for their card issuers to increase the interest rate on the balances, Plunkett said. Another common complaint came from people who paid on time but were hit with rate increases because companies needed to recoup losses from other cardholders, he added.

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 credit limits of no more than a $500 but require large upfront fees. The rules cap those fees at 50% of the credit limit and allow cardholders to pay off the initial balance over a year, not immediately.

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

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

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