December 18, 2008
WASHINGTON, D.C. – New rules adopted by federal regulators today will help protect consumers from certain abusive credit card lending practices that can result in excessive fees and interest rate charges. The rules were developed jointly by the Federal Reserve Board, Office of Thrift Supervision, and the National Credit Union Administration and will go into effect on July 1, 2010.
“Millions of families have been stung by unfair credit card practices that trap them in debt and make it harder to make ends meet,” said Gail Hillebrand, Consumers Union Financial Services Campaign Manager. “When these rules finally go into effect, they will help protect consumers from being gouged by credit card companies and make it easier for families to manage their finances during these tough economic times.” While praising the new protections, Consumers Union criticized the 18 month delay before consumers finally get relief.
Among other things, the new rules will protect consumers by:
• Prohibiting credit card companies from raising interest rates on money already borrowed unless the money was borrowed on a variable rate card, or the minimum payment is made more than 30 days late.
• Protecting new cardholders by prohibiting interest rate hikes in the first year of an account. The only way interest rates can go up in the first year is if the card issuer disclosed a future rate hike at a preset time when the account was opened.
• Imposing a new rule that zero interest means zero, ending the practice of so-called deferred interest.
• Prohibiting credit card companies from charging a late fee if the bill was mailed to the consumer less than 21 days before the due date.
• Requiring payments to be allocated fairly among credit card balances with different interest rates. Payments must be allocated to the highest interest balance or pro rata.
• Prohibiting credit card companies from charging interest on amounts already repaid, through two cycle billing.
• Restricting the financing of fees on credit cards where the fees or deposits use up the majority of the available credit on the account.
Over a third of all credit card users were charged late fees in 2005, according to a report by the Government Accountability Office (GAO). The GAO also found that top six credit card issuers collected $7.4 billion in penalty fees during that year.
On top of penalty fees, the vast majority of credit card contracts allow issuers to increase the interest rate for consumers who pay their bill late, even by a few hours. A low interest rate on a credit card can climb to 30 percent or more after a single late payment or if consumers fall behind on payments to other creditors. These penalty interest rates apply not only to future purchases but also the consumer’s existing balance.
The new regulations were adopted after the three federal agencies received a flood of comments from approximately 66,000 people who weighed in on the proposal – mostly in support of tougher protections for consumers. While the new rules will provide important new protections, more safeguards are needed to address other lending practices that can make it difficult for consumers to manage their credit. Other reforms needed to address some of the abusive practices that hurt consumers are:
• Limiting the amount of “penalty” interest rates, and how long card companies can keep you at these extremely high rates.
• Prohibiting fees for paying a credit card by phone or internet.
• Prohibiting account-opening fees no more than 10 percent of the credit limit.
• Banning multiple over-limit fees during a single billing cycle.
• Ending ALL over-limit fees when it’s the card company’s fault. A consumer shouldn’t be penalized when the credit card company approves a transaction, imposes a credit hold, or charges fees that put the consumer over the credit limit.
• Prohibiting credit card companies from issuing credit cards to young people that do not have either a viable means of repayment or parental consent.
“The new credit card regulations adopted today will help restore some basic fairness to the credit card marketplace, but there is more work to do to protect consumers,” said Pam Banks, Policy Counsel for Consumers Union. “It’s time to end excessive credit card interest rates and fees that undermine the financial well being of millions of American families.”
The three federal agencies decided to put off action on a proposed set of new rules regarding the automatic enrollment of consumers in overdraft loan programs and re-issued a new proposed rule for comment. These programs cost consumers $17.5 billion in fees annually, for $15.8 billion in loans. Consumer groups had criticized the overdraft proposal as too weak. Consumers Union has called on federal regulators to require opt-in before consumers can be charged overdraft fees.
Gail Hillebrand – 415-431-6747
Pam Banks – 202-462-6262
For more information about credit card reform, click here.