Credit card rule to curtail 'unfair' practices kicks in mid-2010

ByABC News
December 17, 2008, 9:48 PM

— -- 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.

A rule to be issued Thursday by the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration is expected to restrict issuers' ability to raise credit card interest rates for any reason and curb the fees charged to borrowers with tarnished credit records.

Ken Clayton, senior vice president of card policy at the American Bankers Association, says the measure will "directly address all the concerns that Congress and others will raise and fundamentally rewrite the way card companies and consumers interact."

But 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 college students.

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

"If the Fed delays the effective date for a year from now, that will be too late for many consumers," warns Lawrence Ausubel, an economics professor at the University of Maryland. "There are certain to be an increased number of troubled consumers next year who will be entrapped by late payments and the resulting increases in interest rates."

A threat to the economy

USA TODAY, in its Credit Trap series, found that as borrowers struggle to stay afloat, banks are aggressively raising rates and fees, often stripping consumers of what little disposable income they have left. That threatens to accelerate the downturn, because consumer spending makes up more than two-thirds of U.S. economic activity.

The paper's investigation also revealed that during the housing boom, banks sharply raised card limits in part because of a surge in home equity, then guided borrowers to use mortgages to pay off card balances. And the series found that banks' practice of packaging and selling credit card debt to Wall Street has given them a powerful incentive to raise card rates and fees.