Feds Approve Rule to Curb Unfair or Deceptive Credit Card Practices

As expected, federal regulators have approved a rule aiming to stop “unfair or deceptive” credit card practices. The Office of Thrift Supervision, Federal Reserve and National Credit Union Administration today approved a rule set to take effect in July 2010 that restricts issuers’ ability to raise interest rates and how they apply payments to existing balances.

In particular, some highlights include:

• Interest rate changes — Issuers cannot increase rates “unless expressly permitted.” Issuers can increase the interest rate after a specific period, provided that the rate was disclosed when the account was opened. Once an account is more than a year old, the interest rate for new transactions may be increased, but must be accompanied by a 45 day advance notice. The interest rate on existing balances may be increased if a borrower is more than 30 days late. “Universal default,” where an issuer can take adverse action based on your payment history with other accounts, will be eliminated.
• Reasonable time to pay — Banks must make sure that monthly statements are mailed or delivered at least 21 days before the due date.
• Payment allocation — When there are balances on an account at different interest rates, amounts in excess of the mininmum payment must be applied using one of two methods: either the excess payment must be applied to the highest interest rate balance or proportionately to all balances.
• Double-cycle billing — This practice, where charges can accumulate based on balances from previous billing cycles, becomes prohibited.
• High-fee subprime cards — Any cards that charge fees that consume most of the available credit within the first year will be banned. Fees exceeding 25% of available credit must be spread over no less than the first six months that the account is open.
• More readable statements — Statements should have more “plain” language with more readable formatting.

With these changes, it’s reasonable to expect that credit card issuers will need to find new profit centers to offset their loss in revenues. That could translate into higher fees. Since the value of acquiring a customer should also drop, I’d also expect fewer and less valuable sign-up incentives. The new rules regarding subprime cards will almost certainly make it more difficult for borrowers with poor credit to get a credit card, but given the predatory practices that some of the subprime lenders have been employing, that is arguably a good thing.