Research and Statistics

Regulators release final rules on unfair credit card practices


One of three federal regulatory agencies approves sweeping new credit card rules. Fed and credit union group expected to follow suit.

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

Two federal regulators have released final rules clamping down on the credit card industry by limiting interest rate hikes on past purchases and eliminating many of the “gotcha” practices that cost consumers millions in fees and interest.

“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 on December 18, 2008, the day the rules were released.

The new credit card rules won’t immediately help families currently struggling with credit card debt. Regulators will give 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.”

The Office of Thrift Supervision (OTS) released the rules early on December 18. The OTS regulates savings associations and thrifts.

“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,” OTS Director John Reich said in a press release.

The National Credit Union Administration (NCUA) — one of three federal agencies jointly releasing the new credit card rules — was scheduled to vote at 10 a.m. Eastern on December 18 to approve the rules for credit unions. The rules mirror those that were up for vote by the Federal Reserve Board of Governors later that day.

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

These events mark 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.

(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.

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See related: A guide to the Credit CARD Act of 2009, Interactive look at what new monthly credit card statements would disclose, New rules don’t cover every credit card issue, How to cope until new credit card rules take effect, House passes Credit Cardholders’ Bill of Rights, Fed backs rules to curb deceptive credit card practices, 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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