Bill Would Let Credit Card Holders Return to Lower Rates

Consumers behind on their credit-card payments could regain their older, lower interest rates if they pay their bills on time for six months, according to a compromise reached by lawmakers seeking changes in federal law governing the credit card industry.


Companies could still raise interest rates retroactively under the Senate proposal brokered between Republicans, who say lenders should be able to take into account a person's behavior, and Democrats, who contend that the practice of hiking rates on past balances prevent consumers from climbing out of debt.

Senate Banking Committee Chairman Chris Dodd, D-Conn., said Monday that the agreement was part of a broader package on credit card reform. The bill was expected to pass this week with President Barack Obama's support.

Dodd had originally proposed an outright ban on retroactive rate increases. But without Republican support, his bill was considered unlikely to overcome procedural hurdles in the Senate.

The latest proposal would prohibit lenders from increasing interest rates on past buys unless the cardholder has fallen at least 60 days behind. At the same time, lenders would be required to review a cardholder's terms every six months. "It makes a strong point to the industry that if they are going to change the terms of a card based on (risk) factors, it should be a two-way street," said Nick Bourke, manager of the Safe Credit Cards Project at the Pew Health Group.

Under the request by Republicans, the bill also would require the Federal Reserve to report to Congress every two years on the cost and availability of credit. "Should this legislation become law, it is crucial that Congress carefully monitor its implementation and effect to ensure that this balance in design is also a balance in fact," said Sen. Richard Shelby of Alabama, the top Republican on the Banking Committee.

Debate on the bill comes as the Center for Responsible Lending estimated that some 10 million cardholders have seen their interest rates increase in the last six months for no particular reason. Many cardholders have seen increases of 10 percentage points or more, the group says.

The Senate bill would require that promotional rates last at least six months. It also prohibits rate increases in the first year after an account is opened.

Other provisions in the bill would:

--Require anyone under 21 to prove that he or she can repay the money before being given a card, or have a parent or guardian promise to pay off the debt if he or she defaults.

--Require lenders to give customers 45 days notice before increasing rates and mail their bills 21 days before the balance is due.

--Ban fees if customers want to pay their bills by phone or online.

--Prohibit over-the-limit fees unless a cardholder elects to be allowed to go over their limit.

--Require lenders to say how much time it would take and how much money in interest would be paid if only the minimum monthly payments are made.

--Require that gift cards remain valid for five years.

The bill would go into effect nine months after enactment. The House passed its own version of the bill in April by a 357-70 vote.