Fed Tightens Card Rate Rules

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Maybe it’s confusion, or maybe it’s a deliberate run around the rules, but for one reason or another some credit card issuers have been charging customers in ways that defy the spirit of the card law Congress enacted in 2009. Now the Federal Reserve is stepping in to stop them.

To curb retroactive interest-rate increases and “fee harvesting,” on Oct. 19 the Fed proposed amendments to the Truth in Lending rules.

“The proposal is intended to enhance protections for consumers and to resolve areas of uncertainty so that card issuers fully understand their compliance obligations,” the Fed said, refraining from accusing issuers of deliberately violating the 2009 rules. The proposed rules are likely to take effect after a 60-day comment period.

The 2009 card reforms included rules barring issuers from raising interest rates on existing card balances unless a customer’s payments were more than 60 days overdue. While banning retroactive rate hikes, the law permitted rate increases in balances built up after the new rate was announced. The law also entitled customers to 45 days notice before significant changes in card terms, such as rate hikes.

Critics say some issuers have raised rates and at the same time offered large rebates for on-time payments, while also reserving the right to revoke the rebates at any time. This allowed them to get around the rules barring rate hikes on existing balances and the 45-day warning period.

Customers could build up balances expecting to pay the low rate created by the rebate but end up paying the higher, pre-rebate rate, even if they’d made all their payments on time.

In its Oct. 19 announcement the Fed said: “Promotional programs that waive interest charges for a specified period of time are subject to the same protections as promotional programs that apply a reduced rate for a specified period.

“For example, a card issuer that offers to waive interest charges for six months would be prohibited from revoking the waiver and charging interest during the six-month period unless the account becomes more than 60 days delinquent.”

The fee harvesting rules prohibits issuers from charging fees during the first year the account is opened of more than 25% of the customer’s credit limit. Some issuers have been getting around this by charging large application fees they view as different from ordinary fees. This too is not allowed, the Fed says.

“Application and similar fees that a customer is required to pay before a credit card account is opened are covered by the same limitations as fees charged during the first year after the account is opened,” it says. An issuer charging a $75 application fee to apply for a card with a $400 credit limit could charge no more than $25 in additional fees for the rest of the year, the Fed said.

Of course, even with these restrictions, a customer should be wary of paying $100 a year for the convenience of a $400 credit limit. High fees and low limits tend to be marketed to customers with poor credit, people who find it hard to get better deals.

People in this situation might be better off using debit cards or pre-paid credit cards.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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