FAQ: Credit Card Rates And Your Rights

Written by By Charles Cooper and Declan McCullagh

Q: Why do banks jack up your interest rates?

The quick answer: Because they can. With no strict regulation preventing the practice, credit card issuers can increase the interest rate they charge at will.

Q: Does it matter that you've been a loyal and long-running customer?

Unfortunately, no. What's more, you're not likely to get much sympathy calling customer support. All banks are feeling the pain these days and the number of their customers defaulting on their credit cards is on the rise.

Q: What is Congress and the Obama administration doing about it?

Earlier this week, the House Financial Services Committee voted 48-19 on what proponents say is a more consumer-friendly bill. Among other provisions, it would cap the amount a bank can hike interest rates on customers' existing balances (except in a limited number of circumstances), provide for more disclosure and outlaw fees deemed unfair. A similar proposal, which was approved in 2008 by the Federal Reserve, is scheduled to take effect July 1, 2010. Consumer advocates are pushing for Congressional action because they want tougher action. Here's more background on those forthcoming regulations.

Q: Aren't there existing laws addressing this?

There were. Many state laws capping interest -- called "anti-usury laws" -- are on the books. But over the last few decades, a combination of federal laws and Supreme Court decisions virtually eliminated those laws, allowing national credit card issuers to relocate in states with high or no usury laws.

Q: How has the banking industry reacted?

With concern. After the House committee vote, Kenneth Clayton from the American Bankers Association predicted that the proposal, if enacted into law, would hurt lenders' ability to offer "reasonably priced credit to consumers" and may contribute to worsening conditions in the broader economy.

Q: What happens if the law is enacted?

Credit card issuers tend to raise rates on existing balances if a borrower defaults on other loans, if economic conditions change, and so on. If Congress limits interest rate increases, lenders will try to make up for the lost revenue somewhere. That could mean a return to annual fees or less generous promotions that give cash back, hotel points, or airline miles in return for spending money.

Q: Will that argument convince policy makers?

Still unclear. Federal Reserve Chairman Ben Bernanke warned recently against regulatory overreach to the point that regulations would prevent credit card companies from innovating. But at the same time, he seemed to suggest that it was time to take action. In a speech, Bernanke said that some aspects of increasingly complex products simply cannot be adequately understood or evaluated by most consumers, no matter how clear the disclosure." In those cases, he continued, "direct regulation, including the prohibition of certain practices, may be the only way to provide appropriate protections."

Q: What is the Obama administration's position?

The president met with credit-card company executives on Thursday. Earlier in the week, his spokesman told reporters that President Obama opposed "deceptive practices" and "outrageous fees." Meanwhile, the President is on record talking about the need to protect consumers against credit-card abuses or deceptive practices that resulted in people paying exceptionally high rates that they might otherwise have avoided had they been better informed about terms and conditions.

By Charles Cooper and Declan McCullagh ©2009 CBS Interactive Inc. All rights reserved
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