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Fed Cracks Down on Credit Card Issuers

If you feel like David against Goliath every time you open your credit card bill, help is on the way. The good news is that new rules approved by the Federal Reserve Board in December will alter the way credit card companies increase interest rates, allocate payments and more. The bad news is that they don’t go into effect until July 1, 2010.

Changes could come sooner if Congress passes the Credit Cardholders’ Bill of Rights. That bill, introduced in the House in January by Carolyn Maloney, D-N.Y., would offer many of the same protections provided by the Fed’s new rules with some additions. Charles Schumer, D-N.Y.,  introduced a similar bill in the Senate, and two additional bills have been proposed as well, by Sen. Chris Dodd, D-Conn., and Sen. Robert Menendez, D-N.J.

According to Federal Reserve Chairman Ben Bernanke, the new rules are “the most comprehensive and sweeping reforms” ever undertaken by the agency. “These protections will allow consumers to access credit on terms that are fair and more easily understood,” he said in a statement.

Here’s a look at the changes:

• More time to pay bills.Companies will be required to send bills to consumers earlier—at least 21 days before they are due. The current requirement is 14 days.

• Limits on interest rate hikes.Once you have a card for a full year, card companies will be allowed to increase your interest rate so long as they give you 45 days’ advance notice of the change. Any increase can only apply to new, future balances.

• Terms you can understand.Companies will be required to spell out all of the terms that will apply to the card for the first year. Your interest rate will not increase for future or past purchases during this time. The only exception will be if you’re more than 30 days late making a payment.

• Highest interest balance paid first.If your card has balances with different interest rates (i.e. from purchases versus balance transfers, etc.), credit card companies often apply any payment that you make to the balance with the lowest interest rate. Once the new rules go into effect, however, card companies will have two choices: (1) They can apply your payment to the highest interest balance, or (2) they can divide the payment and apply it proportionally to all of your balances.

• No more double-cycle billing.Some companies calculate interest for a current month’s bill based on days in the previous billing cycle as well as the current one, resulting in much higher finance charges. That practice will no longer be allowed.

• Relief from exorbitant fees on subprime cards.Credit cards offered to people with bad credit often feature low spending limits and high fees. In some cases, fees are so high that cardholders reach more than half their spending limit in fees alone. Under the new rules, the initial fees can be no more than 25 percent of the card’s credit limit. Further, in the first year, no more than 50 percent of the original credit limit can be charged to the card to cover fees.

Consumer advocates are hailing the new rules as a huge step toward evening the playing field between consumers and credit card companies. “Right now you are really at the whim of the credit card companies,” says Lauren Z. Bowne, an attorney for Consumers Union, a nonprofit advocacy group. “The idea that you borrow money on a credit card and you know the interest rate, that’s going to be very empowering for consumers.”

The most significant changes for most consumers will be the limits on interest rate hikes, the ways in which banks allocate payments to balances with different interest rates, and the requirement that issuers mail statements at least 21 days in advance of the due date. As a result, advocates say, consumers will have more control over their balances and be better able to plan their finances.

Advocates are frustrated, however, that the new rules will not go into effect until July 2010. And, they say, more still needs to be done to protect consumers. They are now working with Congress to pass the credit cardholder bills, which would go into effect sooner than the Fed’s rules and contain some additional protections, including limits on overage charges, restrictions on issuing cards to minors and a ban on universal default (the practice of raising interest to the highest “default” rate when the customer misses a payment with another lender).

Maloney introduced comparable credit card legislation last year, which passed in the House but died in the Senate. The climate has changed significantly since then, however, with the economy ailing and Democrats in control of Congress and the White House.

Meanwhile, the American Bankers Association, which represents many of the nation’s credit card issuers, argues that the new rules and any potential congressional action threaten to limit credit availability and could lead to increased costs for cardholders. But they also applaud the disclosure requirement, calling it “a dramatic improvement over the existing legalistic disclosures.”

But consumer advocates say that less credit availability might not be a bad thing.

“If the only way that credit card companies can give credit is to use unfair and deceptive practices, then the credit shouldn’t be given out,” says Bowne of Consumers Union.

As things stand now, though, it’s up to consumers to be on “red alert,” according to Linda Sherry, director of national priorities for Consumer Action, a nonprofit advocacy group. She recommends paying your bills well before the due date and ensuring that your balance remains significantly lower than your credit limit to keep your credit score strong.

“Look at a credit card as a privilege, not a right,” Sherry says. She also encourages consumers to check their bills each month to make sure that their credit limit and interest rate have not changed.

Michelle Diament is a freelance writer based in Memphis, Tenn.

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