By John Poirier and Karey Wutkowski
WASHINGTON (Reuters) - Rules aimed at preventing credit card holders from being hit by unfair and deceptive practices such as surprise fees and interest rate hikes were approved on Thursday by a U.S. banking regulator.
The new regulations are expected to bring some relief to millions of card holders by restricting credit card issuers' ability to raise interest rates and by giving holders a reasonable time to pay their balances. The rules are expected to result in lower revenue for credit card issuers.
The Federal Reserve Board and the National Credit Union Administration are expected to approve the regulations later on Thursday. The new rules go into effect on July 1, 2010.
Office of Thrift Supervision Director John Reich, whose agency approved the regulations, said in a statement they will "ensure fair treatment" for the millions of American credit cards users.
"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," Reich said.
In 2007, Americans used an estimated 694.4 million credit cards with Visa, MasterCard, American Express and Discover logos, according to the Card Industry Directory.
Citigroup, Bank of America and JPMorgan Chase enjoyed almost 70 percent of the credit card market at the end of 2007, according to the directory.
The American Bankers Association, which represents the biggest credit card issuers, called the new rules unprecedented in scope and said they marked the beginning of a new market structure for credit cards.
"The new regulations will fundamentally alter the relationship that cardholders have with their banks and the way that banks communicate with cardholders," ABA President Edward Yingling said in a statement.
Scott Talbott, chief of government affairs for the Financial Services Roundtable, said the rules will likely result in less credit as banks won't be as able to charge higher interest rates to riskier borrowers.
"You need to be able to reprice for that risk, otherwise banks will grant less credit," Talbott said. "You will have those who manage credit properly subsidizing those who don't."
The rules aim to address several issues consumer groups and U.S. lawmakers have complained about for years. The rules prohibit raising the annual percentage rate (APR) on existing balances except under certain circumstances, such as a payment being more than 30 days late.
Credit card issuers will be required to give consumers 45 days notice before a rate is increased, and holders will be allowed a reasonable amount of time -- 21 days -- to make a payment, according to the rules.
The rules also ban a practice known as universal default, in which a credit card company changes the terms of the card based on how the holder performs on other bills such as utilities or gym memberships.
Issuers will also be prohibited from another highly criticized practice called double-cycle billing, which imposes charges based on the previous billing cycle.
Further, the rules require issuers to allocate payments in excess of the minimum payment to balances with a higher APR or to all balances equally.
Ladenburg Thalmann's banking analyst, Richard Bove, said in a research note he expects the rules to lower industry profits, result in higher rates for holders, and reduce the availability of credit at a time when policymakers are trying to get consumers to spend money.
"Timing for these changes could not be worse," Bove said.
(Additional reporting by Juan Lagorio in New York; Editing by Steve Orlofsky and John Wallace)
