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Fed to rule soon on sweeping credit card changes

Fed to rule soon on sweeping credit card changes

Fed might end surprise credit card rate hikes but restrict credit to high risk borrowers


SIOUX FALLS, S.D. (AP) -- Credit card companies could no longer boost interest rates on existing account balances if the Federal Reserve adopts new rules as written at a meeting set for Thursday.

But as proposed, the changes also could make it more difficult for millions of people with bad credit to get what's referred to as a subprime card.

The rules were proposed in May and drew more than 65,000 public comments.

"That's the highest number we've ever received," said Susan Stawick, a Federal Reserve Board spokeswoman.

Among them: a letter from a single mother of three in Florida who wrote she paid her bill on time but her interest rate shot up from 7.9 to 29.99 percent.

"I would have been better off going to a loan shark. I think their rates are more reasonable," she wrote.

The changes under consideration would ban that practice and others considered by some to be unfair.

"The proposed rules are intended to establish a new baseline for fairness in how credit card plans operate," Federal Reserve Chairman Ben Bernanke said in May. "Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs."

South Dakota eliminated the interest rate cap on credit cards almost 30 years ago and has thrived from the industry that employs as many as 20,000.

The proposed limits on subprime cards could cost the state of 788,000 people from 3,000 to 5,000 jobs, said Gov. Mike Rounds.

"In essence it would shut down the low-limit credit card business across the United States," the Republican said.

Prime credit card companies generally could adapt to the five other proposed rule changes, but there's not a business model that would work for dealing with the changes to subprime cards, he said.

Rounds said he's still urging the Fed to reconsider.

The state's two biggest subprime card issuers are Premier Bankcard and Total Card.

T. Denny Sanford, Premier's owner, is 15th on the Dec. 8 Business Week list of top American philanthropists with an estimated $706 million in giving since 2004. His estimated net worth is $2 billion.

Greg Ticknor, president of Total Card, said he won't know the effect until the change is announced Thursday but the company likely would survive by adjusting the types of cards it issues.

Under the current proposal, some of the 70 million Americans with "challenged credit" probably wouldn't qualify for a card, so they'll instead rely on payday loans, he said.

"In today's economy, that's the opposite of what they should be doing," Ticknor said of the loss of credit.

Prime card issuers such as Citibank South Dakota, which moved its credit card operation from New York after South Dakota's 1979 law change, would also feel the change, said Peter Garuccio, American Bankers Association spokesman.

"The Fed's proposal represents an unprecedented way customers will relate and work with their credit card issuers," he said.

"What it does, by and large, is limit the ability of issuers to use risk-based pricing. And in so doing, the card companies will have to sort of change their models to figure out how to protect changing risks going forward. It'll be a big challenge for the business."

On Thursday, the Fed could adopt the proposals as written or make changes. But it's unlikely the final rules will stray too far because otherwise, the Fed would have to seek public comment again, Garuccio said.

Travis Plunkett of the Consumer Federation of America said the public comments, most of which are posted on the Fed's Web site, show deep frustration.

"A good share of these comments weren't generated by people like me. They were spontaneous from consumers who feel they've been treated unfairly by their credit card companies and are literally begging the Fed for help," he said.

A lot of people acknowledged paying late, often mistakenly, and felt it was unreasonable for their card issuer to increase the interest rate on the balance, Plunkett said.

Another common theme is from people who always pay on time but were hit with a rate increase because the company needed to recoup losses from other cardholders, he said.

"They wake up and get a notice in the mail or a bill telling them that all of a sudden their interest rate is double or triple the rate what it was the day before," Plunkett said.

The proposed changes would let credit card companies increase the interest rate only on new cards and future purchases or advances, not any current balance.

Another new Fed rule would require firms to apply any payment above the minimum to the part of the balance with the highest interest rate.

Some companies now allow consumers to transfer other card debt at zero interest but then require all payments to go toward that amount, not the part of the balance carrying a higher interest rate, Plunkett said.

The other significant change would affect subprime or "fee harvester" cards used by people with a credit score too low to qualify for a normal card. They typically carry no more than a $500 limit but require a large upfront fee.

The Fed proposal would cap that fee at 50 percent of the credit limit and allow the cardholder to pay off the initial balance over a year, not immediately.

"They are both deceptive and unfair," the Consumer Federation's Plunkett said of the cards.

But many of the public comments urge the Fed not to limit the product because it's a way for some people to rebuild their credit rating.

"If adopted, this rule also would have a disproportionate and adverse impact on minority consumers, who historically have had difficulty obtaining access to credit," wrote one Arkansas woman.

Miles Beacom, president and CEO of Premier Bankcard, said in a statement the company supports most of the changes but opposes tighter controls on subprime cards.

"In order to be successful, credit card companies must have the ability to price the product based on customer risk," he wrote to The Associated Press.

Premier is the 10th largest issuer of MasterCard and Visa cards, has more than 3.5 million customers nationwide and a formal complaint rate that's one of the industry's lowest, Beacom wrote.

Roger Novotny, head of South Dakota's Banking Division, said his office typically gets 15 to 25 complaints a month about the state bank.

The company did refund $4.5 million last year to New York customers as part of a settlement reached by the state attorney general claiming Premier Bankcard used deceptive and illegal tactics to market its cards.

Fed to rule soon on sweeping credit card changes: Financial News - Yahoo! Finance
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