Credit-Card Fees Curbed

--Issuers will have send out bills 21 days before the due date --Issuers provide 45 days's notice before changing signicicant terms on the card --Issuers can not hike interest rates unless payments are 60 days overdue --Defaulters can have their original rates reinsated after they pay on time for 60 days. By SUDEEP REDDY Sweeping new restrictions on credit-card companies would ban extra fees and fluctuating rates and arm tens of millions of consumers with more information on their debts. Starting in February 2010, a Senate bill passed Tuesday would ban practices such as charging consumers to pay by phone and sudden surges in interest rates. Payments above the minimum due would be applied to balances with the highest interest rates. Information once relegated to tiny print must be made clearer, and consumers will soon be told how long it would take to pay off a balance if they pay only the minimum due. New restrictions on credit-card companies approved by the Senate could have a big impact on what you pay each month -- even if you pay on time. The credit-card overhaul is set to become the first major legislative change to financial regulation outside housing since the emergency bank bailout enacted last fall, and it's not the last expected this year. Tuesday's 90-5 vote followed pressure from the White House on card issuers to improve fairness and transparency for the three-fourths of U.S. households that use credit cards. The measure is likely to pass the House in the coming days, and President Barack Obama is expected to sign it into law next week. For consumers, the legislation aims to change habits -- perhaps leading them to make fewer big-ticket purchases with credit cards -- by clarifying the cost of using card debt. Several provisions in the legislation are geared toward forcing consumers to recognize how much they're paying in interest. Card issuers would also have to provide information on consumer-counseling and debt-management services. Consumers also wouldn't face a retroactive interest-rate increase on existing balances unless payments are 60 days overdue. Even after that rate increase, a consumer could get the old rate reinstated by paying on time for six months. The legislation bans a practice known as double-cycle billing, in which a late-paying consumer is assessed interest on a prior month's balance that had been paid in full, in addition to the late balance. Issuers also will have to send bills 21 days before the due date and provide at least 45 days' notice before changing any significant terms on a card. "Credit cards are a tremendously valuable and useful tool for consumers, providing them with relief during critical moments," said Senate Banking Committee Chairman Christopher Dodd. "This is a very important industry....We just want it to work better." The legislation marked a major defeat for the credit-card industry, as lawmakers complained that consumers are being hit with tricks and traps on their cards. The Federal Reserve released data Tuesday showing that 6.5% of consumer credit-card loans were delinquent in the first quarter, compared with 4.8% a year earlier. While banks declined to comment on the Senate vote Tuesday, the banking industry had already been gearing up to make changes in anticipation of a tougher regulatory environment. Among the changes that some consumers can expect: a return of the annual fee and fewer promotional rates and offers, as issuers look to offset the loss in revenues resulting from new laws. Consumers can also expect banks to pare back their reward programs. In recent months, card issuers, such as Citigroup Inc., American Express Co., Discover Financial Services and Capital One Financial Corp., have been implementing and testing higher redemption levels or earnings caps on rewards. Jan Freidig, a resident of Petaluma, Calif., received notice in March that the rate on her Citi credit card's balance would go up to 24% from 12%. She called the company to complain. "I was so upset, and they just weren't going to work with me," says Ms. Freidig, 55 years old. "I was always on time and never missed a payment and always paid at least more than what was required." Ms. Freidig says she carried a $5,000 balance at the time, amassed when her husband previously worked in Paris, but wasn't using the card for new purchases. She said the notification of the new terms was "a 25-million-page thing" that she didn't read. "I told them I'm making my payments, but by them raising the interest rates so high, it just becomes impossible," she says. Ms. Freidig says she paid off the card, and closed the account late last month. Citi didn't return a call seeking comment. The rules are expected to bite into industry profits at the same time card issuers are being hit by surging delinquencies and defaults. J.P. Morgan Chairman and Chief Executive James Dimon said Tuesday that losses in the bank's card business, which isn't expected to turn a profit this year, "may be aggravated" by some of the new rules. Mr. Dimon, speaking at the bank's annual shareholder meeting, didn't provide specifics. Many of the changes included in the legislation would have been imposed anyway by rules the Federal Reserve passed in December. But the Senate restrictions go significantly further than the Fed rules, which are to take effect in July 2010. The new rules still allow card companies to raise interest rates on consumers' future charges. And they will do little to stop banks from cutting credit lines for consumers deemed risky. Issuers are already increasing rates for swaths of consumers ahead of the new rules as they try to protect against losses. Edward Yingling, president of the American Bankers Association, suggested the legislation will backfire on consumers. The law "fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk." He added: "It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate." A strong lobbying effort did block some measures that would have hurt the industry even more. A proposal to cap credit-card interest rates at 15% fell far short of enough support to clear the Senate. A measure to allow retailers to offer discounts for customers paying with cash, check or debit -- all cheaper for merchants than credit cards -- failed to reach a full Senate vote, as did most other amendments. —Jane J. Kim and Robin Sidel contributed to this article. Write to Sudeep Reddy at sudeep.reddy@wsj.com