By Sarah Borchersen-Keto, Washington Staff Writer

Federal regulators have approved final rules aimed at protecting consumers from certain credit card practices, such as raising the interest rate on an existing credit card balance despite the consumer paying the bill on time. The new rules will also improve the disclosures consumers receive regarding their accounts.

The changes will go into effect on July 1, 2010, although regulators are urging institutions to make their best efforts to conform as soon as practical, particularly with respect to the provisions related to high-fee cards.

Office of Thrift Supervision Director John Reich said the rules "will enhance public confidence in financial institutions and establish a level playing field for institutions that want to do business fairly without suffering competitive disadvantages."

The American Bankers Association noted that due to the uncertainty facing the financial system, "it's absolutely vital for policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace."

Under the new rules, once an account has been open for a year, a savings institution may increase the rate for new transactions by providing a 45-day advance notice, as required by Regulation Z. Rates on existing balances may be increased if the consumer is more than 30 days delinquent in paying the credit card bill.

Savings associations will also be prohibited from treating a payment as late unless the consumer has been given a 'reasonable' amount of time to pay. The new rules state that 21 days would be considered a 'reasonable' amount of time.

Other elements of the rules would prohibit double-cycle billing, the practice whereby a savings association imposes finance charges based on balances associated with previous billing cycles. In addition, the rules state that, in the subprime credit market, fees exceeding 25 percent of the available credit must be spread over no less than the first six months that the account is open, rather than charged as a lump sum during the first billing cycle.

An additional aspect of the rules state that when an account has balances with different annual percentage rates, payments made in excess of the minimum payment should either be allocated to the highest interest balance or proportionately to all balances. This would prevent the practice of allocating all payments to the balance with the lower interest rate.

Meanwhile, the new rules make credit card and charge card application and solicitation disclosures easier for consumers to use. "The rules represent a significant step forward in consumer protection. By ensuring fairness and making credit terms easier to understand, these safeguards should allow more consumers to benefit from using credit," said Federal Reserve Governor Randall S. Kroszner.

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