In an economic climate that is placing
more emphasis on consumer rights, regulators in the US are
rewriting the rules for credit card companies. Several
long-standing practices such as double-cycle billing are being
consigned to the dustbin. They may not be the only changes, as
Charles Davis


Credit card industry rules adopted by
federal regulators in December 2008 will usher in sweeping changes,
and lawmakers have hinted that they aren’t done yet.

The rules, largely unchanged from a proposal
released in May, ban several controversial card practices, limit
when credit card companies can raise interest rates, dictate
payment allocation methods to benefit consumers, and curtail late

The rules, issued by the Federal Reserve, the
Office of Thrift Supervision and the National Credit Union
Administration, come at a time when the economy has plunged into a
recession, and loan delinquencies and charge-offs are swelling as
borrowers struggle to pay bills.

Regulators, however, are likely to hold off on
a rule related to bank overdraft fees, sources said, because they
need more time to study the issue. Banks are increasingly charging
these fees when consumers overdraw their accounts by cheque or
debit card transaction.

Double-cycle billing

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Double-cycle billing, in which a
card company charges interest not only for the balance of one
billing statement but also for part of a previous one, has been
banned. The rule requires that issuers mail statements at least 21
days before a payment is due and restricts cut-off times and due
dates for payments on days mail is not delivered.

The rules also dictate how companies must
allocate payments. Issuers must allocate any amounts above the
minimum payment either entirely to the balance with the higher
interest rate or to all balances equally.

Regulators also sought to crack down on hidden
fees in subprime credit cards. The rule said no more than 25
percent of the credit limit can be charged in start-up fees on the
first statement of a new account and, if the fees exceed 25 percent
of the total limit, their cost must be spread across at least six

The rules prohibit issuers from raising
interest rates on existing debt except in certain circumstances,
such as when promotional rates expire or when payments are at least
30 days late. They require card issuers to apply monthly payments
that exceed the required minimum at least partly to higher-rate
card debt. Currently, most issuers apply payments first to
lower-rate debt, causing consumers to pay more in finance

They also bar banks from charging a late fee
unless they’ve given borrowers a ‘reasonable’ amount of time to
pay, and the rules are expected to define that as 21 days.
Consumers and public interest groups in the US have long complained
that issuers have designed billing practices so that by the time
they get their bill, they only have a few days to pay it. If
they’re late, they’re hit with a fee of up to $39, and charged a
higher interest rate.

Even as regulators rein in some of the most
egregious credit card practices, consumer groups and legislators
warn that more needs to be done – and quickly – to protect the most
vulnerable consumers.

US consumer groups argue that the rule is
unlikely to restrict how much banks can charge, their ability to
pull back on consumers’ credit limits – hurting their credit scores
– and their aggressive marketing to students.

The expected implementation date of mid-2010
is also troubling consumer groups because banks are likely to
continue their aggressive rate and fee increases until that time as
they grapple with ballooning losses on mortgage loans.

New era of regulation

The rules signal a return to tighter
regulation of the US cards industry after years of rampant growth
and a deregulatory stance by the federal government.

Years ago, credit cards were subject to usury
laws in 50 states that generally capped interest rates at 12 to 18
percent. A 1978 Supreme Court decision changed that, ruling that a
bank could charge the maximum rate allowed by the state where it
had its headquarters.

States such as South Dakota and Delaware
removed their interest rate caps after the ruling, and banks
flocked there so they could charge higher rates.

Then came the evolution of fees. The Supreme
Court ruled in 1996 that credit card fees were ‘interest’ charges,
again subject to state law where the bank is headquartered. That
basically gave banks freedom to expand and raise credit card fees
as much as they wanted. As issuers realised that consumers shopping
for a credit card paid close attention to upfront rates – but not
fees – card rates began falling and a bevy of fees cropped up to
take their place.

Now, with the economy faltering, US issuers
have become even more aggressive about increasing borrowers’ credit
costs, not only raising credit card rates on consumers who pay
their bills on time, but also imposing higher fees, and doing so
more often.

Card issuers under greater

The federal rules might very well be
followed by even more stringent legislation from Congress. Senator
Chris Dodd, a Democrat from Connecticut, responded to the rules by
declaring that the public needs a law to “stop credit card
companies from ripping off their customers and driving them into
deeper and deeper debt.”

“I plan to reintroduce the Credit Card
Accountability, Responsibility, and Disclosure Act when the
Congress reconvenes,” he said in a statement. “This comprehensive
legislation bans a number of practices that the Fed rules do

In the House of Representatives,
Representative Carolyn Maloney, a Democrat from New York and
sponsor of the Credit Cardholders’ Bill of Rights, said that she
would review the new rule and “see what remains to be done to
protect consumers from unfair and deceptive credit card

Issuers argue that the changes go too far –
particularly in limiting card companies’ ability to raise interest
rates and price for risk, even as economists decry tightening
consumer credit. It’s a losing battle with a consumer-friendly
Congress in a mood for greater regulation.

Consumer groups have the ear of lawmakers, and
vow to press ahead with legislative solutions.

“Protecting consumers from the costly credit
card practices that drain their wallets should always be a
priority,” said Center for Responsible Lending president Michael
Calhoun. “But with a faltering economy showing no sign of
improvement, consumers need to be able to hold on to hard-earned
money now-not a year-and-a-half from now.”