New Rules Limit Surprise Interest Hikes on Credit Cards

New credit card rules that will make it harder for banks to surprise consumers with sudden annual interest rate increases are being approved today by several federal agencies.

The rules, which apparently specify that such increases constitute prohibited “unfair or deceptive” practices, also will require lenders to give consumers a reasonable amount of time to make payments, reports Bloomberg.

Already approved today by the Office of Thrift Supervision, which regulates savings and loans, the new rules also are expected to be approved today by the Federal Reserve and the National Credit Union Administration, the news agency notes. They will take effect by 2010.

Lenders still will be allowed to increase annual percentage rates when "expressly permitted,” and may impose penalty interest increases when a payment is more than 30 days late, Bloomberg notes. To increase the interest rate on new transactions, they must provide consumers with 45 days of advance notice.

However, the rules will prohibit so-called universal default—a practice under which some banks hit credit card customers with a rate hike if they are late in paying another creditor's bill—and double-cycle billing, according to CNN Money. Under double-cycle billing, "consumers who carry a balance can get hit with retroactive interest on their previous month's bill—even if they've already paid that off," the news agency explains.

Banks say the new rules are likely to increase the cost of credit for all consumers and make it harder for some with borderline qualifications to get the credit they need. Consumer advocates say the reforms don't go far enough and are hoping for more restrictions to be imposed in federal legislation that is on the drawing board.

The rules demonstrate a significant change in the way consumer lending is being regulated, Brian Gardner of the Keefe, Bruyette & Woods investment bank tells the Washington Post: "Eighteen months ago, the Fed was focused on disclosure and transparency, and now they're coming out with a prescriptive, rules-based guidance. It's a whole different world."