Senate passes credit card bill on fees, interest rate increases

— -- The Senate overwhelmingly approved a bill Tuesday to reform much-criticized credit card practices, putting such changes one step closer to being signed into law by President Obama.

The bill— which passed the Senate 90-5 — imposes restrictions on late and over-limit fees, and on interest rate increases on existing debt. It also requires issuers to consider consumers' ability to pay when issuing cards or raising credit limits.

The House is expected to vote on the legislation as early as Wednesday before sending it to the president. Obama has said that by Memorial Day, he'd like to sign into law reform that will provide "strong, reliable protections" for credit card borrowers.

Sen. Chris Dodd, D-Conn., chairman of the banking committee, hailed the bill's passage as "a victory for every American consumer who has ever suffered at the hands of a credit card company."

Banks say new restrictions, when credit already is tight, will cause them to clamp down even more. "The bill designed to protect consumers will actually harm them by limiting credit and increasing the cost to everyone else," says Scott Talbott of the Financial Services Roundtable, which represents large banks.

Meanwhile, some say the bill doesn't go far enough in protecting consumers. While it's "clearly a step forward, there are major gaps to be filled," says Sen. Bernie Sanders, I-Vt., whose amendment to cap card rates at 15% was defeated in the Senate, 60-33.

Banks also will have nine months to implement many of the changes — too late, some advocates say, for the most vulnerable consumers. The Federal Reserve has issued a rule that clamps down on some of the same practices addressed by Congress, but the rule doesn't take effect until mid-2010.

Credit card issuers "may be tempted to hit card holders with an additional wave of interest rate increases before the law takes effect," says Travis Plunkett of the Consumer Federation of America.

In the past year, banks have raised many consumers' credit card rates even as the Federal Reserve has cut short-term interest rates. Banks say higher funding costs, along with surging loan delinquencies and defaults, have forced them to reassess card risk.