Fed Moves to Institute Curbs On Issuers of Credit Cards

By Jeff Plungis
Bloomberg News
Wednesday, September 30, 2009

The Federal Reserve proposed rules Tuesday to end banks' ability to apply credit card payments to balances with the lowest interest rates first, implementing legislation Congress passed in May.

The Fed also proposed that creditors obtain consumers' consent before charging fees for transactions that exceed credit limits. Restrictions on lending to people under the age of 21 and subprime credit card fees were also included, the Fed said in a statement.

"The rule bans several harmful practices and requires greater transparency in the disclosure of the terms and conditions of credit card accounts," said Federal Reserve governor Elizabeth Duke.

The Fed's proposal would generally prohibit rate increases on fixed-rate accounts in the first year after an account is opened, as well as increases on existing credit card balances. For consumers under the age of 21, cards could not be issued unless the borrower could show an ability to repay the debt or an older person agreed to back the account.

Fees on subprime credit cards, those issued to consumers with lower credit scores, would be capped at 25 percent of the account's credit limit during the first year after the account is opened, according to a description of the rules in the Federal Register.

President Obama signed the credit card legislation in May, describing its provisions as "common-sense reforms" that would "protect consumers."

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