The Federal Reserve will vote today on sweeping changes to the credit card industry that would ban practices such as retroactively increasing interest rates at will and charging late fees when consumers are not given a reasonable amount of time to make payments.

The Fed, which has been considering the proposed changes since May, declined to release details of the final draft regulations. But banking officials and consumer advocates said they do not expect substantial changes before the vote, especially because members of Congress have pressured the Fed not to water down the rules.

If the new credit card regulations are approved largely as proposed, they would represent the most significant overhaul of the industry in decades, banking officials and consumer advocates said. The Fed has not indicated a timetable for implementation.

The changes will include limits on interest rate increases, a ban on raising rates if customers are behind on payments to other companies and changes in how companies calculate finance charges.

The changes are particularly needed now, consumer advocates said, because many borowers are drowning in debt and having trouble making their payments in the midst of a recession.

The Fed first attempted to reform the indusry by forcing card issuers to make disclosures of terms and conditions more user-friendly. That proposal is also to be voted on today.

But consumer advocates said, and Fed officials agreed, that better disclosure was not though. In May, the agency followed with its “unfair and deceptive practices” proposal – which would dictate how credit card companies should apply customers’ paynents that exceed the minimum required each nonth. When different annual percentage rates apply to different balances on the same card, yanks would be prohibited from applying the entire amount to the balance with the lowest rate. Many card issuers do that so that, debts with the highest interest rates linger the longest, thereby costing the consumer more.

Not surprisingly, credit card companies have lobbied against the provisions, particularly the one restricting their ability to raise interest rates. They have said that the changes would force them to withhold credit or raise interest rates because they won’t be able to manage their risk.

Consumer advocates pointed out that card issuers will still be able to raise the rate on an existing balance if the customer is 30 days late on a payment. Furthermore, the proposal does nothing to restrict banks’ ability to raise rates on a customer’s future balance or to use other punitive measures. An increase in credit card delinquencies has already led many banks to cut limits and raise rates.

New Rules on Credit Cards Approved - Won't Help Until July 2010

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