Credit card issuers, starting this week, will be required to give consumers 45 days’ notice before raising their interest rate or making other significant changes to a card plan’s terms.
Under the new rule, borrowers will have the option to decline the new rate and pay off their balance over time under the original rate. Issuers also must begin sending bills 21 days before payment is due.
The new rules are the first of a number of new consumer protections to be implemented under a major credit card law enacted in May. Most of the law’s changes won’t take effect until February 2010.
The changes come as the banking industry has been hiking minimum payments on borrowers, yanking back credit lines and canceling cards. Nessa Feddis, American Bankers Association vice president for card policy, said it was difficult to say how much of the industry’s behavior is being driven by a desire to decrease risk amid a weak economy or by the coming regulatory changes.
“A strong part” of the account closings is due to the new 45-day advance-notice rule, she argued to reporters in a conference call Thursday.
Currently, card issuers often hike rates on consumers due to some triggering event, such as a late payment, that is disclosed in the account application. Borrowers, who often overlooked the fine print, complained that they were being sprung with sudden rate increases.
The new rule would prohibit issuers from basing rate increases on such triggering events by requiring 45 days’ notice for all significant changes in the account terms. The requirement does not apply to certain card plans, such as those with a variable rate or a promotional rate that was disclosed upfront.
More than 70% of U.S. households have at least one credit card and more than half of cardholders pay their balance in full every month, according to the Federal Reserve.
The new credit card law will place several new restrictions on the industry, including additional limitations on rate and fee increases. Card issuers won’t be able to raise rates on an existing balance unless a consumer is at least 60 days late, for example.
The law also curbs certain controversial practices, such as double-cycle billing, in which a late-paying customer is assessed interest on a prior month’s balance that has been paid in full. Those changes won’t take effect until February, while new disclosure rules for credit cards plans will be implemented in July.
The changes will end “the tricks-and-traps business model that was designed to get consumers to accumulate a lot of interest,” said Ed Mierzwinski, who heads financial services matters for the consumer group U.S. PIRG.
Here are some of the high points of the New Credit Card Rules:
- interest rates can only be raised on new charges, not on old balances
- no penalties for late payments within 30 days
- 45 day window for new rules, penalties and must be printed in BOLD TEXT
- Limits yearly interest rate hikes