Q&A: Credit Card Reform

Congress passed legislation that will overhaul the credit card industry by placing new restrictions on interest rate hikes and penalty fees that consumers face.

The Senate passed the bill on Tuesday and the House followed suit on Wednesday. President Obama has said he'd like to sign it into law before Memorial Day.

Here, a look at how some of these changes will affect consumers.

What impact will this legislation have on credit card interest rates?

The legislation will prevent arbitrary interest rate hikes by credit card companies.

Banks will have to wait 60 days before raising the rate on late-paying customers, and they will be required to reinstate the old rate once the cardholder makes payments on time for six months.

The legislation will also prevent companies from raising the interest rate on any outstanding credit card debt consumers have if they are late paying bills for other credit cards they might use. And it will require credit card companies that choose to increase interest rates to periodically review and lower them if the review warrants it.

For new credit card customers, the legislation will also prevent issuers from increasing rates in the first year after the account is opened.

Many banks already offer cards that comply with some of the rules contained in the legislation.

How about the fees that credit card companies charge?

Credit card fees have long been a thorn in the side of consumers. The legislation will prevent issuers from charging a fee to pay off credit card debt by mail, telephone or electronic transfer, except when it requires someone's help to expedite the payment. It will also require penalty fees to be "reasonable and proportional" to the violation.

What about all the credit card terms and conditions?

The legislation requires credit card holders to receive 45 days' notice for any interest rate, fee or finance charge increases. Issuers will also have to post on the Internet the terms of their credit card agreements (some banks already do this).

The 45-day notice and some other parts of the legislation are already scheduled to take effect in July 2010 as part of Federal Reserve regulations. Any legislation, however, will place further limits on fees and on those eligible to obtain a credit card.

The legislation aims to protect people under 21. How will that work?

Young people who are new to the concept of credit cards can quickly find themselves in a pile of debt. The legislation aims to protect people under 21 by requiring the signature of a parent or guardian who will take financial responsibility for the debt. Alternatively, those under 21 could obtain a credit card without a parent's signature as long as they are able to show they have the financial means to repay any balances they might carry on the card.

College students are often lured by the promise of credit cards. The legislation will bolster protection for these students against aggressive credit card marketing and provide more clarity about deals that have been made between credit card issuers and universities.

Are there any benefits for people who pay their credit cards on time?

Yes. The legislation will ban double-cycle billing, under which issuers apply interest to a balance that has already been paid.

It will also require that payments made at local bank branches be credited the same day. And it will prohibit late fees if the issuer delayed crediting any payment.

How soon will these changes take effect?

The requirement that the credit card industry notify cardholders of an interest rate increase will go into effect 90 days after the legislation is enacted. The industry will have nine months to make all the other changes.

Who will police the credit card companies?

The Federal Reserve Board will be the main agency reviewing the practices of the industry and the terms of credit card agreements they make available to consumers. Credit card issuers are also subject to regulation by other state and federal agencies.

How has the financial services industry reacted to this?

Edward Yingling, president of the American Bankers Association, said Tuesday that some of the provisions will "undermine the availability of credit," adding that the legislation would change the "entire business model of credit cards by restricting the ability to price credit for risk."

Banks say consumers can expect more cards with higher annual fees and fewer cards with low competitive rates if this legislation is enacted.

"Credit cards are unsecured loans. There is no collateral backing them up like a home or a car and so when your risk profile changes, their credit terms change," says Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, an industry group. "To the extent that you limit that adjustment — the ability to be flexible — then you're going to limit the availability of credit or increase the price."

With reporting by NPR's Joshua Brockman, Audie Cornish and The Associated Press

Related NPR Stories

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.

Support comes from: