Federal Reserve Releases New Credit Card Rules

By Eva Norlyk Smith, Ph.D.

The Federal Reserve Board on Tuesday finalized the amendments to the Truth in Lending Act, which will lead to greater consumer protections for credit card usage. The 1,100-page document details how the provisions of the Credit CARD Act, which was signed into law in May last year, should be implemented. Credit card companies have until February 22 to implement most of the new rules; a few rules will not become effective until August 2010.

The new credit card rules aim to level the playing field and do away with many of the deceptive and unfair lending practices, which many credit card issuers have engaged in in the past. They outlaw some of the more onerous practices, and aim to provide greater transparency and certainty in lending terms for credit card users.

The new credit card rules aim to level the playing field and do away with many of the deceptive and unfair lending practices, which many credit card issuers have engaged in the past. They outlaw some of the more onerous practices, and aim to provide greater transparency and certainty in lending terms for credit card users.

Many of the new rules passed in the Credit Card Act were already introduced in provisions passed by the Federal Reserve Board in December 2008. However, the Credit Card Act added a number of additional mandatory practices and disclosures. In particular, the new credit card law:

Puts new curbs on interest rate hikes. Card issuers will no longer be able to raise interest rates retroactively on existing balances (excepting, of course, promotional rates), unless the cardholder is 60 days behind with payments. Card issuers can still raise interest rates on future charges, but they have to provide 45 days notice and give the consumer the right to opt out. (The interest rate on variable rate cards will still fluctuate with the base rate they are tied to.)

Introduces protections for underage consumers. The new law puts limits on how credit cards can be marketed to students on college campuses, banning the practice of inducing students to sign up by offering them free gifts as incentives. In addition, credit card companies will no longer be able to issue credit cards to consumers under 21, unless the person demonstrates that he or she has the ability to make the required payments on the account, or obtains the signature of a co-signer.

Bans over-limit fees. Credit card companies will no longer be able to charge an over-limit penalty fee, unless the cardholder opts in for over-limit protection.

Creates fairer billing and payment practices. Some of the more deceptive ways in which card issuers maximized profits from credit cards have been outlawed. The double-cycle billing method of calculating interest charges will be a thing of the past. In addition, card issuers will no longer be able to allocate payments to the balance with the lowest interest first. Any portion of a payment above the minimum required payment has to be allocated to the balance with the highest interest rate.

Introduces clearer disclosures on credit card statements. Going forward, credit card statements must educate consumers about the costs of making only the required minimum payment each month. Statements will also disclose how much cardholders would save in interest charges if the monthly payment is high enough to pay the balance off within 36 months.

Puts an end to fee-harvester credit cards. Credit cards for people with bad credit in the past have been known to charge credit card fees (such as an annual fees, application fees, monthly fees) totaling almost the credit limit of the card. Going forward, credit card companies can no longer charge fees totaling more than 25% of the initial credit limit annually.

The last provisions of the Credit CARD Act are set to go into effect on August 22, 2010. These include rules that require penalty fees and charges to be “reasonable and proportionate,” and provisions which require credit card companies to reevaluate interest rate hikes going back all the way to January 1, 2009, based on cardholders’ current credit profile.

The Federal Reserve Board has created a guide to the new credit card rules on its website, which includes an example of the interest charge disclosures that will appear on credit card statements in the future.

Published: January 14, 2010