Fed Cracks Down on Credit-Card Issuers

The Federal Reserve seemed to be giving consumers the gift that keeps on giving today, when it voted to enact a new set of regulations governing the credit-card industry.

However, this particular present may carry some mixed consequences for borrowers. While the new rules eliminate some unfair industry practices such as retroactive interest rate increases, consumer advocates worry that they don't address some of the worst offenses -- and could actually make the current credit crunch worse over the next few months as cash-strapped card issuers look to recoup lost profits through other means.

“It’s a good first step to start rebuilding the industry for the better,” says Linda Sherry, a spokeswoman for nonprofit advocacy group Consumer Action. She’s quick to point out, however, that it’s not airtight protection against nasty credit-card practices like charging exorbitant late fees.

The Federal Reserve, as well as the Office of Thrift Supervision and the National Credit Union Administration, all passed the regulations without significant changes from the proposals that were released in May. (The proposals were based on 65,000-plus23 consumer complaints). One gripe that won't be addressed this time around: prolific bank overdraft fees. The Fed says it plans to address the fees in 2009.

Here’s what cardholders need to know:

Don’t expect your credit-card issuer to embrace the Fed’s new regulations as one of its New Year’s resolutions. The Fed has given banks until July 2010 to put the new regulations in place. “They don’t want to jeopardize [cash-strapped] banks or people,” says Adil Moussa, an analyst with Aite Group, a financial services research firm. (Banks originally asked for two years to incorporate the rules, while consumer advocates pushed for six months.) .

Once the rules are in place, the penalties that befall a consumer who pays late will be a lot less severe. Make one late payment, and it will no longer effect every credit card in your wallet, says Graham Steele, a consumer lobbyist for Public Citizen, a nonprofit consumer advocacy group. Currently, issuers use so-called universal default policies that allow them to raise your rate based on a late payment made to another creditor. The new rules prohibit that practice, and also keep issuers from raising rates on existing balances unless your payment on their card is more than 30 days late.

The prospect of rules that will make it easier for consumers to pay down their high-rate balances negates any incentive issuers have to offer low teaser rates for purchases and balance transfers, says Sherry. So if you’re in the market for a low-rate offer5, lock it in now. The silver lining: Ongoing rates are likely to stabilize at more reasonable levels, which will be more helpful for consumers carrying a balance.

Under the new rules, issuers must give consumers at least 21 days to make payments after they receive their statement. That statement also requires a clearly-printed due date and time (i.e., 5 p.m. or later) so borrowers can avoid late fees.

Nothing in the Fed rules prevent issuers from freezing or cutting credit lines, or raising interest rates on new purchases -- all tactics they currently employ. Review your statement carefully each month, and call your issuer to check the terms of your account before making any big purchases.

Current industry practices let issuers put all of your monthly payment toward the lowest-rate balance (say, a 0% promotional balance transfer) first, while the rest of your debt accrues interest and fees at much higher rates. That won’t be the case once the new federal regulations are in place. Under the new regulations, consumers' payments go to the priciest debts first, which could go a long way toward helping them dig out of debt faster, says Sherry. “This changes the whole industry,” she says. “The credit-card companies have to find another way to gouge consumers.”

Banks argue that many of the Fed’s regulations limit their ability to effectively adjust terms to reflect risk. One way issuers might try to control their risk exposure is by tightening application standards in order to weed out all but the very best borrowers, says Steele. In particular, a rule that caps fees on secured and other cards that carry set-up and maintenance charges to half the credit limit could lower the amount issuers are willing to extend to borrowers with no credit or bad credit, hurting their ability to build their score.

It's likely Congress will make the Fed’s regulations even tougher, says Steele. The Credit Cardholders Bill of Rights, which passed the House in September, carries provisions that mirror those of the Federal Reserve. The bill now awaits a vote by the Senate.