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Fed Proposes Tighter Controls On Credit Card Rates

Congress Considers Bills to Curb Abusive Practices

By Mark Huffman
ConsumerAffairs.com

May 24, 2007

Plastic Prison • Credit Tips And Tricks • Get Control of What You Owe • No Easy Way Out Of Credit Card Debt • Penalty Fees, Interest Rate Hikes, and Misleading Contracts Await Credit Card Shoppers • "Convenience Checks" Carry a Heavy Price Tag • New Forms of Credit Scoring • Understanding Credit • Credit Bureaus: Who You're Dealing With • Reading Your Credit Report • Credit Scoring: The Fickleness of FICO • Credit Knowledge: A Long, Hard, Struggle --- News • House to Hold Hearings on Credit Card Interchange Fees • Confronting a 'Culture Of Debt' • Feds Back Tighter Credit, Debit Card Rules • Director Takes Aim at Banks in New Film, 'Overdrawn!' • Floating Due Date Snags Chase, Citibank Customers • Congress Takes On Credit Card Interchange Fees • Consumers Lobby Congress to End Credit Card Abuses • Congress Takes On Credit Card Abuses • Credit Counselors Go Risque With their Message • Credit Card Debt Climbs Worldwide • As Credit Delinquency Rises, So Does Credit Relief Scrutiny • Congress Calls Out Credit Card Companies • College Students Warned Against Credit Card Trap • High-Fee, Low-Credit Charge Cards Prey Upon the Poor • Senate Bill Would Curb Abusive Credit Card Practices • Fed Proposes Tighter Controls On Credit Card Rates • Senate Panel Slams Abusive Credit Card Practices • Congress Targets Credit Card Companies For Reform • Report Finds High Debit Card Overdraft Fees • Bank, ATM Fees Continue To Rise • Credit Card Fees Rise, Disclosure Statements Inadequate • Free Credit Reports Mark First Anniversary • Credit Card Debt Sinking Many Older Consumers • Experian Launches New Credit Score; Critics Unimpressed • Credit Cards Target Students • Credit Card Companies Fear "Perfect Storm" • Credit Bureaus Introduce New Scoring System • More Banks Using Universal Default to Hike Interest Rates

Credit card companies would have to give consumers more notice of changes in rates and fees under a new Federal Reserve proposal. The Fed plan is designed to make terms in credit card offers and statements clearer and easier for consumers to understand.

In outlining the proposal, Fed Chairman Ben Bernanke said consumers need more information to shop wisely and better manage their accounts. At least one business news service noted that better informed consumers might be bad for business, and could cut into industry profits.

The Fed is not the only government entity taking a hard look at the credit card industry these days.

Congressional committees have held hearings this spring on alleged industry abuses. Some lawmakers have already drafted legislation to put more controls on credit card companies.

The Fed, meanwhile, has been studying the issue since 2004 but hasn’t made major changes in credit card disclosure rules in more than 25 years. In fact, the issue appears to have been neglected for some time.

An investigation by Consumer Reports, appearing in the November 2005 issue of the magazine, said “cozy relationships” among lawmakers, federal regulators, and credit card issuers have made credit cards “more treacherous” for consumers.

The investigation revealed that credit card issuers have imposed interest rates in excess of 30 percent on consumers whose only offense might be a late payment to another creditor. The report also exposes other practices by issuers of credit cards that pose hazards for consumers, including:

• Battered card holders with fees and penalties that now often hit $39.
• Reduced grace periods when new purchases are free of interest.
• Lobbied successfully to weaken protections for cardholders.
• Increased fees for tardiness and for going over the credit limit.
• Reduced minimum payments, thereby increasing the debt.

Under present rules a temptingly low 1.9 percent APR can morph into double-digit territory at the whim of the credit card company. Or worse, it can climb beyond 30 percent when a consumer does nothing more than sign up for a new credit card, inquire about a car loan, or make a single late payment to any creditor.

Under these rules, banks and credit card companies must provide only 15 days notice before implementing changes to a consumer’s rate. Under the Fed proposal, that would be extended to 45 days, for the express purpose of providing the consumer ample time to shop for a new card. Companies would also have to give consumers 45 days notice before increasing their interest rate because of a late payment.

The proposed rules change would require banks and credit card companies to provide more consumer information about their policies – especially when it comes to interest rates. For example, companies would have to be clearer about what constitutes a late payment and what triggers a penalty.

Credit card companies would also be prohibited from advertising a “fixed rate” card without specifying how long that fixed rate will remain in effect.

Congress Takes Note

Lawmakers, meanwhile, have signaled their intentions to pursue tighter legislative controls on the industry. Sen. Carl Levin (D-MI) chaired hearings this spring on the growing number of consumer complaints about credit cards and has introduced a bill to tighten regulations. Many of his Democratic colleagues are on board.

“I've introduced measures to address these issues in the past and am committed to continuing to look at any and all options, including introducing legislation, to protect consumers,” said Sen. Christopher Dodd, (D-CT).

There is similar sentiment in the U.S. House of Representatives. Rep. Carolyn Maloney (D-NY) has called for a hearing next month to look into the way credit card companies deal with their customers.

“Right now credit-card disclosures are so complicated even an army of MBAs can't understand them,'' Maloney said.

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