Research and Statistics

Credit union regulator approves new credit card rules


New rules will fundamentally change the way credit cards operate, but won’t take effect until July 1, 2010. Consumer advocates say that’s too long to help families struggling with debt in today’s economy.

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See updated story:Federal regulators approve sweeping credit card rule reforms

The National Credit Union Administration joined a second federal regulator in approving final credit card industry rules that limit interest rate hikes on past purchases and eliminate many of the “gotcha” practices that cost consumers millions in fees and interest.

The credit union group — one of three federal agencies acting today on the new credit card rules — approved the rules for credit unions a few hours after the Office of Thrift Supervision (OTS) released the rules, which it approved administratively early today. The OTS regulates savings associations and thrifts. The rules largely mirror those up for vote by the Federal Reserve Board of Governors later today.

“The new regulations will fundamentally alter the relationship that cardholders have with their banks and the way that banks communicate with cardholders,” Edward Yingling, president of the American Bankers Association, said in a press release issued this morning.

The new credit card rules won’t immediately help families currently struggling with credit card debt. Regulators gave banks and credit card issuers until July 1, 2010, to implement changes in their billing, marketing and advertising systems. Enactment of the rules likely won’t come in time to help ease the current credit card crisis, consumer advocates say.

“This is a grave misstep in an otherwise stellar consumer-protection rulemaking,” said Linda Sherry, director of national priorities for Consumer Action, a San Francisco-based consumer advocacy group, in a statement. Regulators have “given banks another year and a half to continue indiscriminate interest rate increases on consumers with historically high credit card balances.”

Adds Chi Chi Wu, an attorney with the National Consumer Law Center in Boston: “It’s got to be quicker to help consumers. That’s a long implementation period.”

OTS Director John Reich said in a press release: “The rule will enhance public confidence in financial institutions and establish a level playing field for institutions that want to do business fairly without suffering competitive disadvantages.”

In addition to unfair or deceptive practices, the Fed will consider rules requiring clearer disclosure of credit card terms, such as due dates and times, year-to-date totals on interest and fees and the implication of making only the minimum payments on credit card bills each month.

Sweeping changes
Today marks the culmination of more than four years of federal hearings, reviews and consumer studies into the oft-criticized practices of the nearly $1 trillion credit card-lending industry. The rules represent the most sweeping changes to credit card industry practices in more than three decades — a period of exponential growth in credit card use, easy credit offers and growing American dependence on credit to pay basic living expenses.

The new rules require credit card issuers to, among other things:

  • Limit interest rate hikes on existing credit card balances.
  • Ban double-cycle billing.
  • Cap fees on subprime credit cards.
  • Require payments in excess of the minimum amount due to go to balances with the highest interest rates first or divided on a proportional basis.
  • Give cardholders at least 21 days to pay monthly bills.

The rules required multiple agencies’ approval because of the complicated regulatory landscape in American banking, in which different agencies set the rules for different types of banks. The OTS rules will apply to savings associations (thrifts), the NCUA rules will govern credit unions, the Federal Reserve’s version will apply to banks.

(See: What the new credit card rules mean to you.)

A year of financial upheaval
Federal Reserve Chairman Ben Bernanke had promised to release the final rules by year’s end. The release comes in a year of financial upheaval, bank failures, bankruptcies and stock market swings not seen since the Great Depression.

The new rules also come at a time when consumer advocates and members of Congress have accused regulators of not doing enough to prevent the financial sector from imploding in the subprime mortgage meltdown. Too little regulation, they say, helped fuel risky investments in mortgage-backed securities.

A poll conducted in June 2008 found that nearly three out of four Americans felt the government should regulate the credit card industry more closely. The proposed credit card rules generated a record number of comments filed with the Fed, many from angry consumers pleading for relief from mountains of credit card debt.

Even critics of the proposed rules acknowledged that the Fed — challenged by Congress to rein in abusive credit card practices or face legislative efforts to do so — would likely act in some way given the public response, pressure from Congress and current political climate (President-elect Barack Obama’s campaign had a pro-consumer agenda that supported a five-star rating system for credit cards). Critics of the new rules, however, said they preferred to have regulatory reforms rather than legislative actions because the Fed was more knowledgeable about banking operations than members of Congress.

Opponents of the new rules — mainly banks and credit card issuers — argued that many of the measures would hinder their ability to react quickly when users become more risky borrowers, known in the business as re-pricing. The effect of the regulations, they say, would be to restrict the amount of credit available to all credit card users. Thanks to the credit crunch and recession, that is already happening.

Yingling repeated earlier cautions about the potential impact of the new rules.”The Fed itself has recognized that they may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history.  With the uncertainty facing our financial system, it’s absolutely vital for policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace.”

The rules will affect the overwhelming majority of Americans. According to Federal Reserve statistics, three out of four households in the United States have at least one credit card, and most Americans have several: The Card Industry Directory estimates that Americans carry more than 694 million cards branded with the logos of the four main transaction processing firms — Visa, MasterCard, Discover or American Express.

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See related: What the new credit card rules mean to you, New rules don’t cover every credit card issue, How to cope until new credit card rules take effectHouse passes Credit Cardholders’ Bill of Rights, Fed backs rules to curb deceptive credit card practices, Fed moves to close timing loophole in credit card payments, Senate banking chairman: Credit card reform on tap, Proposed credit card rule changes draw massive response, Poll: Nearly 3 in 4 feel need for more credit card regulation, Obama will usher in credit card reform, observers say

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