The U.S. Senate overwhelmingly passed legislation yesterday to impose sweeping new restrictions on credit-card companies, responding to consumer anger over mounting fees and higher interest rates amid a recession. The 90-5 vote followed pressure from the White House to deliver a bill that would increase disclosures, limit extra charges and ban a variety of practices on rate changes for the three-fourths of U.S. households that use credit cards. The measure is expected to pass the House of Representatives and President Obama is expected to sign it next week.
This legislation is a major defeat for the powerful credit-card industry. The new rules, which would take effect in February 2010, would bring much needed relief to consumers from abusive, highly profitable credit card industry practices.
Here are several highlights under the new rules:
- Credit card companies will have to apply payments that exceed the minimum payment due first to the principal balances with the highest interest rate.
- Credit card companies will not be able to raise interest rates on existing balances until payments are 60 days overdue. And even after that type of rate increase, the old lower interest rate would automatically be reinstated once the consumer made on-time payments for six consecutive months.
- Credit card companies would no longer be able to double-cycle bill. This is an abusive practice in which a late-paying consumer is assessed interest on a prior month’s balance that had been paid in full, in addition to the late balance.
- Credit card companies also will have to comply with more strict disclosures for credit cards such as sending bills 21 days before the due date and providing a minimum of 45 days notice before changing any significant terms on a card.
Credit-card executives say the new rules could lead to higher interest rates for even more consumers—including those paying their bills on time—to offset the risks of offering unsecured loans, particularly during the economic downturn as delinquencies rise. The Federal Reserve released data Tuesday showing that 6.5% of consumer credit-card loans were delinquent in the first quarter, compared with 4.8% a year earlier.
The new legislation still allows card companies to raise interest rates on consumers’ future charges. And it does little to stop banks from cutting credit lines for consumers deemed risky. Issuers are already increasing interest rates for millions of credit card holders as they try to protect against losses.
A strong credit card industry lobbying effort did block some measures such as a proposal to cap credit-card interest rates at 15% which failed to win enough support to clear the Senate.
Source: WSJ.com
