The Federal Reserve recently promulgated new rules to support consumers and limit abusive credit card practices.  The only catch, the new rules take effect in July 2010.


On December 18, 2008, the Federal Reserve finalized new rules to protect consumers and prevent unfair credit card practices. These rules are a result of information obtained through consumer testing and 60,000 comment letters, according to the Federal Reserve’s press release.

Unfortunately, they will not take effect until July 1, 2010.

Meanwhile, credit card issuers warn that imposing more restrictions on their business could lead to further reductions in credit, just when it is so hard for consumers to get loans. Even consumers with perfect credit will somehow suffer from higher prices, says the credit card industry.

In the meantime, credit card issuers have raised rates and fees on millions of consumers as they suffer loan losses. From March 2007 through February 2008, approximately 70 million credit card accounts — nearly one in four accounts — had their interest rates increased, including existing balances, costing consumers at least $10 billion in additional finance charges, estimates The Pew Charitable Trusts, a public policy group.

Something clearly needs to be done now.

"The revised rules represent the most comprehensive and sweeping reforms ever adopted by the Board for credit card accounts," said Federal Reserve Chairman Ben S. Bernanke.  "These protections will allow consumers to access credit on terms that are fair and more easily understood."  

The new rules protect consumers from unexpected interest rate increases in several ways:

• Interest rates may be increased, but ONLY on new purchases.

• Cardholders must be clearly informed 45 days prior to the effective change in rate.

• The disclosed interest rate at account open must be maintained, unless the disclosed rate is tied to a variable index, or the rate was clearly disclosed as a limited duration rate.  

• The interest rate may also be increased where the consumer’s minimum payment is received more than 30 days after the due date.

• The regulations provide that consumers receive a “reasonable amount of time” to make their credit card payment. The bank's safe harbor is triggered when statements are sent at least 21 days prior to the payment deadline.  

• The new rules also eliminate unfair payment allocation methods, which maximize interest charges to consumers. Banks will be required to allocate payments exceeding the minimum payment to the balance with the highest rates first.

• The new rules also address sub-prime credit cards by limiting the fees that reduce the amount of available credit, and forbid banks from imposing interest charges using the "two-cycle" billing method.

Both the House and Senate currently have bills pending which propose to clamp down on such industry practices, and President Obama urged U.S. credit card companies to reform their practices, saying they should stop unfair rate increases and be more transparent and accountable.  Charles Schumer, D-NY, and Sen. Christopher Dodd, D-CT, called on the Federal Reserve to impose an "emergency freeze" on issuers' ability to raise interest rates. USA TODAY's research has found that for a growing number of consumers, credit card rate increases — rather than mortgage troubles — are pushing them into economic distress.  In addition, a new FICO study found that 11% of US consumers -- 22 million people -- have had their credit lines cut or accounts closed even though they have been paying their bills on time and retain a solid rating.

So in this time of economic crisis, why must we wait until July 2010?

Some consumer advocates say the delay is yet another example of lawmakers prioritizing the banks above working families amid the downturn.  According to the Washington Independent, the delay in the credit card reforms is just the latest example of what happens when leadership goals smack headfirst into political reality and the credit industry-lobbying juggernaut.

The Wall Street bailout is also playing a factor in the debate. Elizabeth Warren, the Harvard law professor who chairs the congressional panel overseeing the Troubled Asset Relief Program (TARP), grilled Treasury Secretary Tim Geithner about whether it is appropriate for bailout beneficiaries to turn around and hike fees and interest rates on their customers.  “People are angry that, even if they have consistently paid their bills on time and never missed a payment,” Warren said, “their TARP-assisted banks are unilaterally raising their interest rates or slashing their credit lines.”

The battle lines are being drawn, with yet another critical policy test for the new administration.  Congress and President Obama must continue to work together to pass meaningful credit card reform now.


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Information collected from the Federal Reserve website, AP Press and Reuters.