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Fed to Vote on Credit Card Reform Regulations

In May, the Federal Reserve Board proposed rules to prohibit unfair practices regarding credit cards and overdraft services.

The rules were primarily intended to protect folks from unexpected increases in the rates charged on their pre-existing credit card balances.  The rules would eliminate the practice of the use of “universal default” clauses in credit card agreements, as well as a number of other pro-consumer changes.

The rules also would prevent banks from imposing interest charges using the “two-cycle” billing method and would require that consumers receive a reasonable amount of time to make their credit card payments, and would prohibit the use of payment allocation methods that unfairly maximize interest charges. They also include protections for consumers that use overdraft services offered by their bank.

“The proposed rules are intended to establish a new baseline for fairness in how credit card plans operate,” said Federal Reserve Chairman Ben S. Bernanke.  “Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs.”

The proposed changes to the Board’s Regulation AA (Unfair or Deceptive Acts or Practices) would be complemented by separate proposals that the Board is issuing under the Truth in Lending Act (Regulation Z) and the Truth in Savings Act (Regulation DD).

The FTC Act proposal includes five key protections for consumers that use credit cards:

  1. Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period of time.
  2. Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges.
  3. Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible.
  4. Banks would be prohibited from imposing interest charges using the “two-cycle” method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle.
  5. Banks would be required to provide consumers a reasonable amount of time to make payments.
    1. The rules also address subprime credit cards by limiting the fees that reduce the available credit. In addition, banks that make firm offers of credit advertising multiple rates or credit limits would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest rate and highest credit limit. The rules are a great step towards improving the credit card situation in the U.S., making credit card disclosures and agreements more consumer friendly.  The rules, in many ways, overlap the terms of the Credit Cardholder’s Bill of Rights Act passed by the U.S. House in September.

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