The Federal Reserve Bank has issued proposed rules that will place extensive limits on common practices of credit card issuers. In a news release dated May 2, 2008, the Federal Reserve proposes rules whereby:
- 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.
- Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges.
- 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.
- 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.
- Banks would be required to provide consumers a reasonable amount of time to make payments.
According to the press release from the Federal Reserve: “the proposed rules are intended to establish a new baseline for fairness in how credit card plans operate. Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs.”
If approved following public comment, these practices would be deemed “unfair and deceptive” and could subject credit card issuers in violation of the new rules to civil penalties.
Needless to say, credit card issuers will gear up a publicity campaign to challenge or water down these new rules. A spokesman for the American Bankers Association calls the Fed’s proposals “an unprecedented regulatory intrusion into marketplace pricing and product offerings.”
Anyone may submit a comment on the new rules at the Federal Reserve’s web site and I encourage all consumers to write and post statements in support of these new rules. In particular, I strongly support the proposed rule that would disallow credit card issuers from changing the interest rates on existing balances except in very unusual circumstances. In my bankruptcy practice, I regularly see situations where a family is able to sustain payments on balances, but ends up in bankruptcy because a 5% rate gets boosted up to 25% as a result of a late payment or two.