Credit card rules kick in

WASHINGTON – New federal protections for credit-card users go into force today, but in advance of the tougher rules banks have been raising fees and interest rates – hoping to ensure that one of their historically most lucrative lines of business remains that way.

Since Congress approved the landmark credit-card overhaul legislation last spring, many plastic issuers have jacked up interest rates, switched accounts from fixed to variable rates and raised annual fees and penalties for late payments. The actions will help banks lock in revenue ahead of the new restrictions under the Credit Card Accountability, Responsibility and Disclosure Act.

Since April, the average variable rate on new cards has risen steadily to 11.22 percent as of this week from 10.69 percent, according to Bankrate.com, a consumer finance Web site. This comes even though the prime rate, the index that card rates are generally pegged to, hasn’t moved during that period.

“It seems (banks) are getting their shots in while they can,” said Greg McBride, senior financial analyst at Bankrate. The sweeping actions by banks – which must now give customers at least 45 days’ notice when making a significant change – signal a profound shift in the way banks and consumers deal with plastic. Bankers and others have argued that the new law will further crimp consumer spending by leading to reduced access to credit and higher interest rates for cardholders, thus hurting an economic recovery.

Consumers say they are already feeling the pinch of higher credit card fees.

Melody Davenport, 44, of Stockton, Calif., says the rate on her credit card issued by JPMorgan Chase nearly doubled this summer to about 11 percent. She says she is carrying a balance of about $12,000 on the card, which means Davenport is now paying an additional $50 a month in finance charges.

“When I make payments now, the principal doesn’t go down,” she said. “I’m not real happy.”

A spokeswoman for JPMorgan Chase would not say how many of its cardholders have been hit with interest rate increases in recent months.

“Changing costs are requiring Chase to more closely examine the rates and terms we offer our customer,” Chase spokeswoman Stephanie Jacobson said in an e-mail. She said the bank had not increased late-payment fees.

Bank of America, the second-largest credit card bank, said that in April it told some customers whose rates were below 10 percent that they would increase starting in June. Other card accounts also were “repriced” based on a review of credit risk, spokeswoman Betty Riess said.

She declined to give the total number of cardholders affected but said it was fewer than 10 percent of all credit-card accounts. In its financial statement filed with the Federal Reserve, the bank reported personal card loans of $69.4 billion as of June 30.

Consumers trim debt

After seeing their housing and personal wealth hammered by the recession, American consumers are saving more and paring down their debts, a trend that the new law could reinforce.

For the three months that ended June 30, U.S. households on average carried a credit-card balance of $7,987, down from a high of $8,529 in the third quarter of last year, according to Moody’s Economy.com.

With longer notifications and mailing of bills at least 21 days before the payment due date, as well as other rules that card issuers must comply with later, the law could lead to consumers using credit more discriminately and help them further reduce their debts.

“People are changing their mind-set,” said Jacob Gold, an author and certified financial planner in Scottsdale, Ariz. “They’re understanding that they need to get their arms around their debt.”

Companies lose billions

At the same time, card companies in recent months have drastically cut back on solicitation mailings, tightened lending standards and slashed credit limits.

In taking steps before today’s deadline, banks have cited the weak economy but also appear to be anticipating fundamental changes in this line of business. Card issuers have lost billions of dollars in the last year, according to regulatory filings. And come February, the law will restrict their ability to raise interest rates on existing balances, a method that banks used – some too aggressively – to reduce risk and boost profits.

Total credit-card lines have fallen sharply at Bank of America and other lenders as they have racked up increasing losses because of defaults. Banks charged off a record 9.55 percent of their credit-card loans in the second quarter, according to the Federal Reserve.

Although more recent signs suggest that credit-card defaults may be stabilizing, banks face continued troubles in this sector, given that card delinquency rates typically track unemployment – which is expected to stay high for the next couple of years. The new credit-card rules will add to the already precarious climate for card issuers, says Peter Garuccio of the American Bankers Association.

“The business model is totally different now,” he said.