WASHINGTON — The Senate passed legislation Tuesday to protect credit card holders from sudden interest-rate spikes, but consumer groups and card issuers warned that people are still likely to face obstacles in getting and maintaining credit.
The Senate vote was 90-5. The House of Representatives is expected to approve the bill overwhelmingly, probably Wednesday, and it then will go to President Barack Obama, who's pushed hard for the legislation.
The new law would protect consumers from sudden increases in interest rates, but companies are saying that they'll be more selective in issuing cards.
The Senate vote represents "the biggest reforms of the industry since the invention of credit cards," said Peter Garuccio, a spokesman for the American Bankers Association.
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Consumer groups voiced similar thoughts. "The biggest change is that the contract between the consumer and the companies will become stronger," said Nick Bourke, the manager of the Pew Safe Credit Cards Project, which provides education and advocacy for consumers on credit matters.
That may not mean instant help for many people, however.
The bill, similar to regulations the Federal Reserve Board issued recently that will take effect in summer 2010, probably will require significant changes in how card issuers do business, notably by offering fewer cards to high-risk consumers.
"There will be a different business model going forward," Garuccio said.
Issuers long have practiced "risk-based pricing," in which they impose higher interest rates on people who are more prone to pay late. The bill will restrict issuers' ability to increase interest rates, and as a result "your ability to use risk-based pricing is very limited," Garuccio said.
Consumer groups have a more immediate concern: Most of the bill's provisions won't go into effect for nine months, giving card issuers time to hike interest rates, a practice that helped spur the congressional action.
Pew surveyed 12 large card issuers last year and found that 93 percent of the cards permitted the issuers to raise any interest rate at any time. Eighty-seven percent of the cards could have automatic penalty interest-rate increases imposed on balances, even if the accounts weren't 30 days or more past due.
As a result, the study said, "current credit-card practices place American cardholders at risk of sudden, potentially drastic price increases, which can seriously impair a household's stability and spending power."
The legislation takes strong steps to discourage such practices. The Senate measure would require that consumers get 45 days' notice before any new interest rates, fees or finance charges went into effect. Interest rates couldn't be increased during the first year an account is open, and promotional rates must remain in effect for at least six months.
It would prohibit issuers from imposing retroactive rate increases until consumers are more than 60 days behind in payments. After six months, if the consumers have paid the minimum balances on time, the lower rates would return.
The bill also would require parents or guardians to guarantee any debts assumed by cards issued to most people younger than 21, unless the young people have sufficient independent income.
Consumers need to be unusually vigilant in the months ahead, said Adam Levin, the chairman and co-founder of Credit.com, an education and advocacy Web site.
Even after the law takes effect, issuers still would be able to cut off customers' cards suddenly. While the measure restricts changes in credit card interest rates, it sets no limit on what rates can be imposed initially. Issuers also can still cut customers' credit limits dramatically.
Consumers should "come up with a plan to reduce debt," and "have an arsenal of credit cards, so if one experiences a cutback, they can go to another," Levin said. They also should try to pay off balances first that are subject to the highest interest rates.
People should be aware of what fees and rates are being imposed. Go online constantly, Levin advised, look for such charges and question anything that seems unusual.
Garuccio, though, maintained that issuers aren't about to act arbitrarily or irresponsibly. They've known for months that changes are coming and have moved to change their practices.
"The industry is already taking steps to implement the new rules," he said.
For instance, it may impose higher interest rates in the future because it's unable to spread risk as it has in the past.
Garuccio cited this example: If a company gives cards to 20 people with the same credit profiles, history shows that one will have trouble paying on time (though recent experience suggests that two of the 20 could have problems). The issuer has no way of knowing who might have that trouble, so all 20 get a lower interest rate at first.
In the past, the company then would charge the delinquent consumer a higher interest rate than the others. Since new restrictions on rate increases are likely, however, the company would be inclined to charge all 20 a somewhat higher rate from the start.
Consumer groups remain wary, warning that simply because the president and Washington lawmakers are celebrating a great consumer victory, the fight isn't necessarily over.
"This bill is a significant first step," Levin said, "but it's not a silver bullet."
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