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New rules promote smarter use of credit cards

Get ready for the sticker shock from your credit cards to hit you even sooner.
/ Source: The Associated Press

Get ready for the sticker shock from your credit cards to hit you even sooner.

The government's new watchdog wants consumers to have a complete picture of a card's costs before they apply — including its exact interest rate and credit line. Currently those terms aren't determined until after an application is processed.

Having the information upfront will help borrowers make smarter choices, according to David Silberman, the assistant director for card markets for the new Consumer Financial Protection Bureau.

"When the costs and risks of a credit card are clear, consumers generally will make wise decisions about borrowing," said Silberman. He said letting people compare rates and credit limits before applying for a card would be a significant step toward that goal.

The CFPB can't prevent consumers from charging too much and it can't dictate the interest rates banks charge. But it's planning several changes aimed at helping consumers avoid fees and debt overload, simply by making the right information available, Silberman said.

In addition to the early disclosure of specific interest rates and credit lines, the agency is considering tweaking the summary of rates and fees that appears on marketing materials.

For example, balance transfer offers usually carry a one-time fee of about 4 percent. Yet the first line of the summary of terms lists the interest rate for balance transfers, which often is a promotional rate of 0 percent. The fee information appears several lines down.

The CFPB also is developing easier-to-understand legal disclosures for new card customers.

The changes would build on sweeping new regulations that went into effect last year.

Under the new rules, monthly statements must now state how long it would take to pay off debt if only minimum payments were made, and how much interest a borrower would pay over that period. Statements show how much borrowers need to pay to be debt-free within three years.

To understand the effect of the additional disclosures, officials are studying data from credit bureaus, academics and regulators that were produced for a conference marking the one-year anniversary of the new requirements.

So far, the additional information appears to be helping consumers.

A phone survey of 800 cardholders by market research firm Synovate found that about one-third of the respondents who noticed the changes to their bills, used their cards less or made larger payments. About the same number said the new rules make it easier to pay on time, according to the study, which was commissioned by the CFPB.

Those who earn less — and who tend to incur more penalty fees and pay higher interest rates — were even more likely to say the changes helped.

A separate study by Harvard Business School professors found that the three-year schedule for paying down debt has caught on with some consumers. Many more people are now paying on that schedule, according to the study, which was based on account data from a large Minnesota credit union. Borrowers with past problems managing their debt were most likely to use the three-year payment schedule.

The studies were part of a larger collection of research requested by the CFPB. The agency wanted to track changes in the market after the credit card regulations went into effect. The studies reveal significant changes; however, it can be difficult to tell whether the changed behavior is a result of the new rules or the struggling economy.

For example, fewer accounts were charged late fees — 5.7 percent in November, compared to 6.5 percent in February 2010, before the new regulations took effect, according to the Office of the Comptroller of the Currency.

That could be in part because it's easier to avoid late fees now that bills are due on the same date each month. The new rules also ensure that borrowers have 21 days to make a payment after receiving their statements, and bar late fees on payments received by 5 p.m.

Still, the weak economy probably plays a role since cash-strapped families are trimming all sorts of avoidable expenses. Total card debt per borrower dropped to $4,965 at the end of last year. That's a 10 percent decline since the first quarter of 2008, according to data from credit bureau TransUnion.

As the CFPB staffs up and sets its agenda, its leaders will continue trying to influence the consumers by giving them more, better information, Silberman said.

"Consumers are used to seeing headline or stated interest rates that don't reflect the true costs of their credit cards over the long term," he said. Now that the rates reflect the true cost, he said, sticker shock might discourage some people from getting a card in the first place.

The agency will be officially up and running this summer.