Amid the economic crisis and rising job losses, consumers - even those with strong credit records - have been defaulting at high levels on their credit cards. Banks already battered by the mortgage and credit crises have been bleeding tens of billions in red ink from the losses.
The rules were approved by the Federal Reserve, the Treasury Department's Office of Thrift Supervision and the National Credit Union Administration. The changes mark the most sweeping clampdown on the credit card industry in decades and are aimed at protecting consumers from arbitrary hikes in interest rates or inadequate time provided to pay the bills.
"The revised rules represent the most comprehensive and sweeping reforms ever adopted by the (Federal Reserve) for credit card accounts," Fed Chairman Ben Bernanke said in a statement. "These protections will allow consumers to access credit on terms that are fair and more easily understood."
Most of the rules were first proposed in May and drew more than 65,000 public comments - the highest number ever received by the Fed. They also restrict such lender practices as allocating all payments to balances with lower interest rates when a borrower has balances with different rates.
But the changes also could make it more difficult for millions of people with bad credit to get what is known as a subprime card carrying higher interest rates, some experts say.
In addition, consumers will have to be given 45 days notice before any changes are made to the terms of an account, including slapping on a higher penalty rate for missing payments or paying bills late. Under current rules, companies in most cases give 15 days notice before making certain changes to the terms of an account.
The changes could cost the banking industry more than $10 billion a year in interest payments, according to a study by the law firm Morrison & Foerster.
Roughly 16,000 companies in the U.S. issue credit cards. The biggest lenders include Discover Financial Services LLC, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corp., American Express Co. and HSBC Holdings.
"The regulations affect a lot of things. Some of the things we don't do, never did, and some of the things will affect us," David Nelms, CEO of Riverwoods, Ill.-based Discover Financial, said in an interview. Nelms said, for example, that the company doesn't have account-opening fees and gives customers well over 21 days to make payments.
Sen. Carl Levin, D-Mich., said the new rules "are a good first step, but they don't prevent a number of unfair, deceptive and predatory practices that saddle many American families with crushing debt."
"Every day the taxpayer is being asked to foot the bill for our biggest banks' irresponsible lending practices," Levin said in a statement. "America's banking giants can't be allowed to dig themselves out of the hole they are in by loading up American families with unfair fees and interest charges."
Levin and Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, have proposed stringent legislation to change credit card practices.
The head of the American Bankers Association called the changes "strong new regulations ... (that are) unprecedented in their scope and signal the beginning of a new market structure for credit cards."
"While the new rules are designed to increase protections for consumers, the Fed itself has recognized that they may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history," ABA President and Chief Executive Edward Yingling said in a statement. "With the uncertainty facing our financial system, it's absolutely vital for policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace."
The new rules prohibit:
-Placing unfair time constraints on payments. A payment could not be deemed late unless the borrower is given a reasonable period of time, such as 21 days, to pay.
-Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account.
-Unfairly computing balances in a computing tactic known as double-cycle billing.
-Unfairly adding security deposits and fees for issuing credit or making it available.
-Making deceptive offers of credit.
Travis Plunkett, legislative director of the Consumer Federation of America, said customer frustrations run deep, as reflected in the comment letters submitted to the Fed.
Many of them "were spontaneous from consumers who feel they've been treated unfairly by their credit card companies and are literally begging the Fed for help," he said.
Many people acknowledged paying late, often mistakenly, and felt it was unreasonable for their card issuer to increase the interest rate on the balance, Plunkett said. Another common theme came from people who pay on time but are hit with a rate increase because the company needed to recoup losses from other cardholders, he added.
Under the new rules, credit card lenders will be required to apply any payment above the minimum to the part of the balance with the highest interest rate.
The so-called subprime cards for people with low credit scores typically have no more than a $500 credit limit but require a large upfront fee.
The rules cap that fee at 50 percent of the credit limit and allow the cardholder to pay off the initial balance over a year, not immediately.
The Consumer Federation estimates that credit card debt held by U.S. consumers is about $850 billion, some four times what it was in 1990.
Associated Press writers Carson Walker in Sioux Falls, S.D., and Madlen Read in New York contributed to this report.
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