A long-awaited relief

In late December the Federal Reserve Board finally adopted rules to limit some of the most egregious credit-card industry practices. Unfortunately, the changes don’t go as far as many consumer organizations wanted, and they won’t go into effect until July 1, 2010.

The new rules will protect consumers by:

• Prohibiting credit-card companies from raising interest rates on money already borrowed unless it was borrowed on a variable-rate card, or the minimum payment is made more than 30 days late.
  
  
• Prohibiting interest-rate hikes in the first year of an account. The only way interest rates can go up during the first year is if the card issuer disclosed a future rate hike at the time that the account was opened.
  
  
• Imposing a new rule that “zero interest” really means zero, ending the practice of so-called deferred interest.
  
  
• Prohibiting credit-card companies from charging a late fee if the cardholder’s bill was mailed out less than 21 days before the due date.
  
  
• Requiring that payments be allocated fairly among credit-card balances with different interest rates. Payments must either be allocated to the highest interest balance or prorated.
  
  
• Eliminating two-cycle billing, a practice by which the credit-card company uses the previous two billing periods to determine your interest charges. So even if you paid your last bill in full, you might find interest charges on your next one.
  
  
• Restricting the financing of fees on credit cards in cases where the fees consume the majority of the available credit on the account.

Though the changes should be good for consumers, credit-card companies have warned that since it will be more difficult for them to raise rates on existing customers, new customers applying for a card might be subject to higher interest rates and fewer introductory offers. The new regulations “may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history,” according to a statement from the American Bankers Association.

Bear in mind that card terms could be altered before the rules go into effect. So keep a close eye on your accounts in the meantime. And many fees weren’t tackled in the new regulations. Issuers can still impose as high a default rate as they want, charge for bills paid over the phone or online, slash credit limits when they want, and charge overlimit fees for purchases that were approved by the card company. To learn more about what the rules will and won’t do, go to www.creditcardreform.org/learn.html.

This article was also published in Consumer Reports Money Adviser. Subscribe now to get more expert financial advice you can trust.