Proposed credit-card rules aren’t enough, consumer advocates say

NEW YORK — Consumers may soon get a break from high penalty fees and retroactive rate increases on their credit cards.

The Federal Reserve and other banking regulators last week proposed new regulations designed to end unfair and deceptive credit-card practices that have cost consumers billions of dollars. As Fed Chairman Ben Bernanke put it, the rules “are intended to establish a new baseline for fairness in how credit-card plans operate.”

Consumer advocates hail the proposed regulations, which are expected to be finalized by the end of the year, as a good first step, but argue that more reforms are necessary to protect the unwary.

Gail Hillebrand, senior attorney with Consumers Union, the nonprofit publisher of Consumer Reports magazine, said the most important change is that card issuers will be prohibited from boosting the interest rate on outstanding balances, unless an account is delinquent. Delinquent, as defined by the regulators, means the minimum payment hasn’t been received within 30 days of the due date.

“I get letters all the time from people who paid one day late, two days late and got bumped into penalty interest — to 29 percent, say, from 12 or 14 percent,” she said. “The new regulations mean that they (card issuers) can’t raise the rate on money already borrowed for no reason or a flimsy reason.”

Another proposed rule will end a problem involving “teaser” rates, such as the zero-percent offers on balance transfers. Currently, credit card companies will take a consumer’s payment and apply it to the balance with a zero-percent rate and not to the balance reflecting new purchases at a higher rate. Under the new regulations, the payment will have to be divided among the various categories.

Card issuers have complained that this is the equivalent of forcing them to provide consumers with a free loan.

“Yes it is, because that’s what you promised,” Hillebrand responds. “Now the person actually will have to get the benefit of the promotional rate they signed up for.”

Other proposed changes would prohibit companies from charging late fees if their bills haven’t been mailed at least 21 days before the payment due date and would ban so-called double-cycle billing, which can result in consumers paying interest on a previous month’s balance that already has been paid.

Card issuers say they’re worried that adoption of the rules could have unintended consequences.

Ken Clayton, senior vice president of card policy for the American Bankers Association trade group in Washington, D.C., said the regulations as proposed would make it harder for card issuers to price their products to account for risky customers.

“Right now, people who manage credit well get lower interest and pay lower costs … and that’s the majority of Americans out there,” he said. “Unfortunately, some of the proposals may keep us from imposing higher costs on those with higher risk, so we would have to impose higher costs on everyone, including those who weren’t so risky, and that’s unfair.”

He said the most important issue was “disclosure,” or making sure consumers know what the rules are.

“There are issues beyond disclosure, but the industry is listening — and making changes and providing consumers with choices,” Clayton said.

Travis Plunkett, legislative director of the nonprofit Consumer Federation of America in Washington, D.C., said consumer groups have long argued that the Fed needed to go beyond ordering more disclosure and actually ban many credit card practices.

“We said, if these practices are unfair, it doesn’t do a lot of good telling consumers about them. It’s like telling them, ‘You’re about to get mugged.’ But, in fact, it’s not fair to mug them,” he said.

Plunkett pointed out that there are a number of bills currently pending in Congress that would go beyond the proposed rules, most endorsed by consumer groups. Among the reforms:

Greater controls on how card companies market to college students and others under 21.

Tighter limits on late and over-limit fees.

Putting a ceiling of 7 percent on “penalty” interest rate increases.

Banning fees when consumers want to pay by telephone or over the Internet.

Plunkett also believes the Fed proposals don’t go far enough to ban so-called “universal default,” under which a credit card issuer can raise the rate on an account that’s current if a consumer gets into trouble with another account, or if his or her credit score drops.

Plunkett noted that such penalty rates can make it even harder for consumers to right themselves.

“It’s often the people in the most vulnerable situation who are hit … and need these protections,” he said.