Fed Tightening Credit Card Rules

May 5th, 2008 by Kenneth Long

On Friday May 2, the Federal Reserve announced a proposal that would rein in abusive practices of some credit card issuers. It would also place new restrictions on credit cards that all card issuers would have to follow.

Most of the changes relate to interest rate hikes, the charging of fees and disclosures to new applicants. Also included in the Fed proposal are revisions to billing and payment cycle rules.

Interest Rate Changes

Credit card issuers might be blocked from raising a cardholder’s interest rate for reasons deemed unfair. This could effectively end the once common practice of universal default. Most major card issuers abandoned universal default practices voluntarily after increased Congressional scrutiny regarding the practice.

Credit card issuers may have to wait until a cardholder is a full 30 days delinquent before they can justify raising the interest rate. Additionally, there may be new restrictions on charging over-the-limit fees resulting from holds, such as from a rental car company or hotel. Banks may be blocked from charging a fee based on such holds.

Credit card balances split into multiple interest rate categories may see payments disbursed in a way favorable to the cardholder. Card issuers currently apply payments to the lowest interest rate balance first. These rules would apply to any portion of a payment that exceeds the minimum payment.

Billing Cycle Changes

The Fed has recommended that cardholders are ensured a reasonable period of time in which to make a minimum payment. This could substantially reduce the charging of some late fees.

The double cycle billing practice would also end under the Fed proposal. This eliminates finance charges incurred on a zero balance that are based on a carryover from the previous billing cycle.

Disclosures and Requirements

Credit card issuers may have to be more forthcoming in revealing eligibility requirements for the best rates that they advertise. It may not be enough to simply disclose that applicants with lower creditworthiness may automatically receive an alternate product.

Deposit and fee requirements may change for some products. Fee harvester cards may be permanently banned.

Feedback

Consumer groups argue that the Fed proposal does not go far enough. They want even more restrictive measures put in place. One such proposal was originally submitted by Rep. Carolyn B. Maloney (D-NY). She is the sponsor of the Credit Cardholders’ Bill of Rights Act (HR 5244) that would place more aggressive consumer protections on the credit card industry.

Fed Chairman Benjamin Bernanke stated that “consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs.” Bernanke believes that the proposal provides a new standard for fairness for credit card plans.

Credit card issuers, on the other hand blasted the proposed changes. The Chief Executive of the American Bankers Association, Edward Yingling, stated that “the Federal Reserve’s proposal is an unprecedented regulatory intrusion into marketplace pricing and product offerings.

Industry insiders threatened that such changes could lead to even more restrictive credit offerings, which could severely limit access to credit cards for subprime borrowers. Any changes however will not be voted on until after the 75 day public comment period has passed. Final proposals could go into effect by the end of 2008.

Vision Credit Education, Inc.