Credit card changes will give consumers a break

The rules from federal regulators represent a sweeping change. But the new limits on fees and rates don’t start until 2010.

From? Tiffany Hsu?December 19, 2008

Responding to rising consumer complaints, federal regulators Thursday adopted the most sweeping new rules for the credit card industry in three decades, including tougher restrictions on interest rate hikes and late fees.

The regulations, which take effect in July 2010, would block card companies from applying higher interest rates on existing balances. Late fees could not be charged without giving consumers at least 21 days to make a payment.

The new measures were needed to reverse a trend in which the pricing schemes and terms of credit cards have grown increasingly complicated and obscure, leaving consumers frustrated by mysterious charges, Federal Reserve Chairman Ben S. Bernanke said.

The banking industry opposed the measures, contending that card issuers would be less likely to take a chance on people with weak credit. Card companies will also be forced to raise interest rates to cover the expense of the new measures, saddling most card users with higher costs, said Edward L. Yingling, chief executive of the American Bankers Assn.

But consumer advocates said the measures, adopted by the Fed, the Office of Thrift Supervision and the National Credit Union Administration, were needed to address hidden traps and fees nestled in the fine print of card applications.

“There has been a long time since these regulations have changed, and banking and card companies have had very successful lobbies that kept any meaningful legislation at bay,” said Ginna Green, a spokeswoman for the Center for Responsible Lending. “But consumer advocates and congressional leadership have put the pressure on regulators to do what really needs to be done for a number of years.”

Nicoli Tucker, a marriage and family therapist from Northridge, was among those pushing for changes.

Tucker has held multiple cards over the years, and said she had watched her interest rates soar over time from 5% to as high as 28%. At the same time, she has watched the time she is allotted to make a payment shrink to as little as two weeks, down from almost a month.

Several years ago, Tucker said she accepted a credit card with a $15,000 limit through a bank’s promotional offer to finish a home-remodeling project, which she said she paid off within four months.

But after Tucker missed a notice for what she described as an unexplained $6 service charge, late fees on the disputed charge quickly barreled up to $80.

“They lure customers in and then do all these switch-ups,” she said. “There’s not a single person who doesn’t have my story.”

One of these “switch-ups” is known in the industry as two-cycle billing, and would be banned under the new rules.

In two-cycle billing, consumers can be assessed interest charges on balances they thought had been paid off. Under this billing scheme, when a consumer pays the entire account balance one month but does not do so the next month, the card company calculates the interest based on the balance for both months.

Many credit card accounts also carry different interest rates for different balances — for example, imposing separate rates for purchases, balance transfers and cash advances.

Currently, card issuers can apply any payments beyond the minimum to the balances with the lowest interest rates, regulators say. Under the new rules, any payment the consumer makes beyond the minimum must be applied to the balance with the highest interest rate or spread proportionally to all balances.

The last set of wholesale changes to credit card rules was made in 1981, and regulators began reviewing possible changes several years ago, Fed spokeswoman Susan Stawick said. The joint action by the three regulators ensures that consumers will get the same protections for cards issued by banks, thrifts and credit unions.

The easy availability of credit cards has created a nation with 1.2 billion credit cards and nearly $1 trillion in credit card debt, four times the level of 1990, according to consumer groups.

Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, said cardholders shared the blame for this debt load.

“It’s high time credit is only extended to people who are creditworthy, because consumers have been living on the edge,” she said. “The slightest financial hiccup, like a sudden high interest rate, can put them into financial distress.”

But restrictions on cards will lead banks to tighten credit — just when the economy needs all the consumer spending it can get to lift itself out of recession, said Richard Bove, an analyst at Ladenburg Thalmann.

“Timing for these changes could not be worse,” he said.

Most credit cards are issued by banks, and opposition to the new rules was spearheaded by the industry’s trade group, the American Bankers Assn. Group executives said this year that changes could lead to high prices and less consumer credit and would represent potentially dangerous government intervention in an already unstable marketplace.

The changes in pricing, terms and availability of credit cards caused by the new rules could also reduce credit card industry revenue by $12 billion a year, according to a study by law firm Morrison & Foerster. But after the adoption of the new rules Thursday, ABA senior federal counsel Nessa Feddis struck a conciliatory tone.

“The agencies have spoken: Regulators recognized that consumer disclosures were dated,” Feddis said. “It doesn’t matter what we think — banks don’t have a choice and will have to comply and move on . . . compliance is always more expensive than people think.”

Although consumer advocates generally applauded the action, some had reservations.

Travis B. Plunkett, legislative director of the Consumer Federation of America, said one “notable problem” was that regulators opted to give credit card issuers too much time to comply with the rules.

“The number of consumers falling behind on payments is increasing, so it’s just not helpful to consumers to give companies the green light to keep using practices that the Fed acknowledges are unfair and deceptive for an extra 18 months,” he said.

Plunkett said he expected Congress to step in to try to speed up and broaden the rules to include bans on aggressive lending to young consumers, excessive penalty fees and multiple charges for a single overdraft violation.

To that end, Sen. Christopher J. Dodd (D-Conn.) said he planned to reintroduce a bill when Congress reconvenes that would go beyond the Fed rules in addressing industry practices.

Since the Fed first put the rules out for public comment last spring, more than 65,000 people wrote in with suggestions — a record for an agency proposal, spokeswoman Stawick said.

People across the country, including retirees and college students, shared horror stories about retroactive interest rates, ruined credit ratings, unpredictable due dates and exorbitant late fees.

In one comment to the Fed, Todd Downing of Culver City complained that his interest rate shot up to 22.9% from 9% after he was late on a payment. That increased his minimum monthly payment to $240 from $80 and forced him to default on the card.

Nikki J. Poling of Long Beach says the high fees on her credit cards make it tougher to pay for life’s necessities.

“I have had to use my credit cards in ways I never thought I would have to,” she wrote. “I look at what they’re charging me to use them and it is simply ridiculous. With the costs of food going up, gas going up, I don’t need this. It is scary to me and my family.”

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