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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

• 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 • Retailers Applaud GAO Report On Interchange Fees • Schumer Moves to Clean Up Credit Reporting Ads • Report: Deceptive Credit Card Practices Remain Widespread • Dodd Bill Would Freeze Credit Card Rates • Annual Credit Card Fee Makes a Comeback • Credit Card Holders Angrily Abandon Their Cards • Fed Proposes New Credit Card Rules • Lawmakers Propose Faster Adoption Of New Credit Card Rules • Acid Test: Prepaid Debit Card vs. Big Bank • J.D. Power: Customer Satisfaction With Credit Cards Falls • How To Survive The New Credit Card Rules • New Credit Card Law Not A Cure-All • Consumer Credit Continues To Shrink • Consumers Using Credit Cards To Stay Afloat, Survey Finds • Credit Cards Giving Consumers Heartburn • Obama Signs Credit Card Bill • Olive Garden Settles Credit Card Data Exposure Suit • Video — Credit Card Law May Produce Unintended Consequences --- • More about credit cards

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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