The US Federal Reserve along with other regulators has approved far-reaching credit-card reforms.

These reforms are aimed at checking the ability of lenders to increase interest rates, give consumers time for repaying their dues, and improving disclosure, among other amendments.

The new rules will go into effect on 1 July 2010. They will restrict a bank's ability to raise interest rates on existing balances, except in certain circumstances, and will also prevent them from from applying borrowers' payments over the minimum in a way that maximises interest charges.

Moreover, the rules also stipulate that whenever there are changes in account terms, more written notices are required. They also ensure better price disclosures at the time of opening accounts, statements and other literature. They also mandate that card issuers allow consumers 21 days to pay their bills.

The Office of Thrift Supervision, which regulates savings and loans, and the National Credit Union Administration have approved the rules. John Reich, the director of the Office of Thrift Supervision, said "the rule 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."

Consumers have been vocal about issuers' aggressive pricing. Advocacy groups link credit cards to a vicious cycle of increasing bills, charges and fees that trap consumers in a never ending cycle of debt.

On the other hand, the financial-services industry has time and again said that limiting its ability to set prices based on risk could mean higher costs for card users across the board, besides reducing credit availability, mainly for borrowers with lower credit scores or limited credit history.

By setting the time for the application new rules for July 2010, the Fed has allowed an 18-month lead time to allow institutions to make major changes, as meeting the deadline would be a challenge.

Consumer Bankers Association's president Joe Belew said that the rapid growth in credit-card use brought complex terms and conditions which a number of card users found confusing. In a statement, he said "We think the federal banking agencies' new rules reflect the concerns raised in the legislation considered by Congress earlier this year, and may possibly make credit card terms easier for consumers to understand." He also said that with the implementation of these new rules, consumers should be ready to see credit become more expensive, and less available, with fewer reward programmes, and a comeback of credit cards carrying annual fee.

Reports termed the Fed's move as the "largest crackdown on credit card companies in 30 years". Card issuers will now have to redesign, rebuild and reprice their offerings based on the new rules.

A few of the highlights of final rules regarding credit card accounts are:

Regulation AA (Unfair Acts or Practices)

Final Rule amends Regulation AA to prohibit unfair or deceptive acts or practices by banks with respect to credit card accounts from 1 July, 2010.

Time to make payments

This amendment prohibits banks from treating a payment as late for any purpose unless the bank has provided a reasonable amount of time for the consumer to make that payment, and will allow protection to banks that mail out statements to customers at least 21 days before the payment due date.

Allocation of payments

This amendment ensures that banks allocate payments exceeding the minimum payment to balances with the highest rate first, or on a pro rata basis across balances, in cases where differential annual percentage rates (APRs) apply to different balances on the credit card account, such as purchases, balance transfers, cash advances.

Increasing interest rates

Banks have been asked to disclose at account opening all interest rates applicable to the account, and have been prohibited from revising those rates except in certain circumstances. An increased rate can be applied if the rate disclosed at account opening expires after a specified period of time, else banks can amend the rate due to the operation of an index (in case of a variable rate), or if they provide a 45-day advance notice as per regulation Z. Banks can also increase the rate if the minimum payment is received more than 30 days after the due date.

Two-cycle billing

This major amendment prohibits banks from calculating interest using the "two-cycle billing" method. Under this method, if a consumer pays the entire account balance in one month, but does not do so the subsequent month, banks calculate interest for the second month using account balances for the days in the previous billing cycle, as well as the current billing cycle.

Financing of security deposits and fees

This addresses concerns with regard to subprime credit cards that charge high fees and have low credit limits. Banks would not be allowed to finance security deposits and fees for credit availability, like account-opening or joining fee or membership fees, if charges assessed during the first 12 months were in excess of 50 per cent of the initial credit limit.

The rule also mandates that security deposits and fees charged at account opening are limited to 25 per cent of the initial credit limit, and any additional amount up to 50 per cent of the credit limit be spread evenly over at least the next five billing cycles.

Regulation Z (truth in lending) final rule

This is aimed at improving the effectiveness of disclosures that consumers receive in connection with their credit card accounts and other revolving (non home-secured) credit plans.

Applications and solicitations

Format and content changes make the credit and charge card application and solicitation disclosures more meaningful and easier for consumers to use. The changes include:

Format Revisions – new format requirements for the summary table include rules about type, size, the use of boldface type for certain key terms, and the placement of information.

Content Revisions – that stipulate that creditors disclose the duration that penalty rates may be in effect, simplify disclosures about variable rates, and revise disclosures about when a grace period is offered on purchases or when none is offered.

Periodic statement disclosures

This contains revisions to make disclosures on periodic statements more understandable, primarily by making changes to the format requirements, such as by grouping fees and interest charges together. The changes include:

a) Interest Charges and Fees: Interest charges and fee now would be grouped separately, with a monthly total for each. They would be itemised as per the type of transaction, such as interest on purchases, cash advances, etc. Separate year-to-date totals for fees and interest charges would also be required.

b) Effective APR

The requirement to disclose an "effective annual percentage rate" has been removed on account of a lack of consumer understanding of the term. New requirements to disclose interest and fee totals for the month and year-to-date have been put in place to inform consumers more effectively of the total cost of credit.

c) Minimum Payment Disclosure

The new rules mandate the disclosure of the effect of making only the minimum required payment on the time to repay balances, as specified by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Changes in consumer's interest rate and other account terms

Circumstances under which consumers receive written notices of change in their account terms have been expanded, and the amount of time these notices must be sent before the change becomes effective has also been increased. The changes include:

a) Increase in advance notice for changes in terms
The new regulations increase the amount of advance notice before a changed term can be imposed from 15 to 45 days. This will better allow consumers to obtain alternative financing or change their account usage.

b) Requiring prior notice for penalty rate increases

Creditors must provide 45 days advance notice before they increase a rate due to the consumer's delinquency or default or as a penalty.

c) Summary table

When a change-in-terms or penalty-rate notice accompanies a periodic statement, the regulations now require creditors to provide a tabular disclosure on the front side of the periodic statement showing the key terms being changed.

Many more changes have also been made by regulators in addition to the ones above.