U.S. credit card rules take effect

Months after being written into law, tough regulations governing the U.S. credit card industry took effect on Monday.

The rules are largely aimed at preventing banks from employing tactics designed to plunge card users into a never-ending cycle of debt.

The lenders serving risky borrowers say high fees and interest rates are necessary because their customers are more likely to default on loans. Restrictions on what they charge could put them out of business and leave the neediest with no options at all, they say.

Meanwhile, advocacy groups say the rising public anger toward the credit card industry show the need for greater consumer protections.

"It's in nobody's interest to lend people money they can't afford to repay," says Kathleen Day of the Center for Responsible Lending. "If the economic crisis we're in now doesn't underscore that for lawmakers, what will?"

Sweeping regulations

Under the new regulations, interest rates cannot be raised in the first year after an account is opened unless an introductory rate has come to an end. After that, cardholders must be notified 45 days in advance of any rate change.

For existing balances, rates can't be raised unless the account is at least 60 days past due. If payments are made on time for six consecutive months, the original rate must be restored.

Disclosure rules have been updated so that cardholders will see how many months it will take to pay off a balance if only minimum payments are made. Statements will also indicate how much needs to be paid each month to pay off a balance within three years.

Service fees, formerly largely uncapped, will be capped at 25 per cent of the credit limit during the first year of use.

The new law also requires grace periods to stay consistent from month to month. Statements must be sent out 21 days before the payment due date, and finance charges and fees cannot be applied before that period is up.

Fees that banks charged for going over credit limits used to be as high as $39. Under the new rules, the cardholder must specifically agree to permit transactions that exceed the credit limit, and the fees can't be triggered by charges other than purchases.

And finally, credit cards can't be issued to anyone under the age of 21 without a co-signer.

Canada enacted similar legislation in the fall of 2009. Some of those rules came into effect in the new year, with the remainder to be implemented in September.

Although in both countries the rules stop short of a flat-out cap on interest rates, they are designed to rein in some of the more cavalier lending practices.

One of the more widely circulated subprime cards for risky borrowers, the Premier Bankcard, for example, comes with a $45 processing fee paid before the card is issued, a $75 annual fee, a $29 fee for a second card and a $29 fee for going over the credit limit. The card itself has a credit limit of $300 and charges 59.9 per cent interest.