New rule on credit card rates

In the most sweeping changes to credit cards in decades, regulators are expected to release a rule Thursday that would crack down on so-called unfair and deceptive practices by card issuers, such as raising interest rates on existing debt.

The rule, issued by the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration, comes at a time when the economy has plunged into a recession, and loan delinquencies and charge-offs are swelling as borrowers struggle to pay their bills.

The final rule will be substantially similar to what regulators proposed in May and will take effect in mid-2010, according to two sources with knowledge of the matter. The sources declined to be named because they are not authorized to speak publicly before the rule’s release.

Regulators, however, are likely to hold off on a rule related to bank overdraft fees, the sources said, because they need more time to study the issue. Banks are increasingly charging these fees when consumers overdraw their accounts by check or debit card transaction.

The new regulation is expected to:

•Prohibit issuers from raising interest rates on existing debt except in certain circumstances, such as when promotional rates expire or when payments are at least 30 days late.

•Require card issuers to apply monthly payments that exceed the required minimum at least partly to higher-rate card debt. Currently, most issuers apply payments first to lower-rate debt, causing consumers to pay more in finance charges.

•Bar banks from charging a late fee unless they’ve given borrowers a “reasonable” amount of time to pay. (The rule is expected to say that 21 days will be considered reasonable.) Some consumers complain that by the time they get their bill, they only have a few days to pay it. If they’re late, they’re hit with a fee of up to $39, and charged a higher interest rate.

The OTS led regulators’ efforts to reform credit cards when, in August 2007, it asked for public comment about financial institutions’ lending practices. Banks have opposed the restrictions, especially in a rocky economy, saying that they will likely cause lenders to reduce credit and raise costs.

But Travis Plunkett of the Consumer Federation of America says the recession makes the reforms more important than ever.

Credit: Kathy Chu

Source: USA Today