Federal regulators have proposed new rules and laws for credit card companies which are aimed to regulate some fee and interest practices.

The proposed rules include:

• Card holders will be given at least a 21 day grace period to make payment. Consumers often end up with late payments because of the short amount of time between receiving their billing statement and the payment due date. This rule; however, isn't likely to change overall repayment grace periods, but will likely affect how quickly credit card statements are disbursed.
• Credit cards companies cannot allocate card holder payments to different types of balances. For example, a card company cannot assign $90 of a card holder's $100 payment to a balance transfers which has a lower interest rate, and assign only the remaining $10 towards the higher interest rate charged for new purchases.
• Card companies cannot raise interest rates on balances incurred in the past.
• Card companies cannot charge over limit fees because of a hold on a credit card account. In some situations where the total charge isn't yet determined; such as filling-up at the gas station, the credit card company will authorize the charge. Since the amount of the fill-up is not yet known, the card company's authorization may be well above the actual fill-up cost. Meanwhile, that authorization amount is considered 'spent' until the actual fill-up cost is determined. If that authorization amount pushes the credit limit over, other charges could considered as over the limit. This also applies to overdraft fees on debit card accounts. The proposed change would eliminate such over limit fees.
• Card companies cannot unfairly add security deposits and fees for issuing credit or making credit available.
• Card companies would have to eliminate double billing cycle finance charges. This is the most costly method of computing finances charges and can lead to consumers paying interest on balances that have already been paid.
• Card companies would have to be explicit as to card terms. For example, some card companies entice applicants by offering low interest credit cards, but do not explicitly disclose the requirements for that low rate before the application applies. This rule would stop such deceptive credit card offers.

Because of the competition for customers, credit card issuers compete in the same marketing arena as other issuers, which could be viewed as unfair and deceptive practices. But its not only credit card companies... almost every company engages in some sort of marketing practice which could be considered deceptive. For example, a pizza company offers 3 pizzas for $10.00, but when you call they tell you your order total is much higher, because the 3 for $10 only allows one topping each. Yet, for some reason, the federal government is focusing on credit card companies, possibly due to the current credit crisis and public outcry of a bad economy. Whether good or bad, legislatures must take some form of action or face being ousted the next election.

The proposed rules would be the biggest influence on the credit card industry in decades. Federal Reserve Chairman Ben Bernanke said the proposed rules "are intended to establish a new baseline for fairness in how credit card plans operate." Consumers using credit cards "should be better able to predict how their decisions and actions will affect their costs," he said.

These regulations may be because the Fed drew criticism for its slow response to abuses that contributed to the subprime mortgage crisis, and are now attempting to appear as proactive. "These steps are a significant improvement," said Sen. Charles Schumer, a member of the Banking Committee and a leader in legislative efforts to make credit card companies more forthcoming about the interest rates they charge. "While they can still go further, the Fed deserves credit for acting, particularly for banning some awful practices rather than relying solely on disclosure."

Last year the Fed proposed rules that would make credit card bills and solicitations easier to understand, but Friday's proposals go well beyond those in tightening interactions between the industry and consumers.

"At first blush, this does seem to be good news for credit card holders," said Sen. Robert Menendez, author of pending legislation addressing some of the same credit card abuse issues. "However, it remains to be seen if these proposals will go far enough."

The banking industry opposes the changes, and says they could lead to higher interest rates. The rules could be finalized by the end of the year.

The agencies said the proposed rules also would require federal credit unions to give consumers a chance to opt out of an overdraft protection program. And they would prohibit those institutions from charging a fee for an overdraft caused by a hold placed on consumer's funds when a person uses a debit card.

Ken Clayton, senior vice president of card policy for the American Bankers Association, described the proposed changes as "aggressive regulatory intervention in the marketplace that will result in higher prices and less consumer credit."

"If card companies cannot fully reflect risk, then millions of consumers with good credit histories will end up with higher rates," the ABA's president and CEO, Edward L. Yingling, said in a statement.

"It's unfortunate that the industry continues to buck the immense groundswell of support that is building for credit card reform," said Rep. Carolyn Maloney, who has introduced consumer protection legislation in the House. She said the Fed endorsement of provisions in her bill "puts to rest the credit card companies' assertion that reform will somehow harm consumers or the economy."

The Consumer Federation of America estimates that credit card debt held by consumers is about $850 billion, some four times what it was in 1990. The group says the average debt for those 58 percent of card holding households that do not pay their balance in full every month is about $17,000.

Travis Plunkett, legislative director for the federation, said the rules were a "good faith effort by the Federal Reserve to curb some of the most significant abuses that have been hurting credit care users for over a decade." He singled out the practice of lenders increasing interest rates on a borrower because of a supposed problem with another creditor or a drop in the borrower's credit score.

The Fed is acting in conjunction with the National Credit Union Administration and the Office of Thrift Supervision.The Federal Reserve Board and the National Credit Union Administration made their similar announcements on Friday.

Together, the agencies regulate most banks, meaning new rules would have wide impact. The proposal, however, faces what figures to be a testy public comment period, during which banks are expected to challenge any new rules and ask the agencies to scale them back.

According to the Office of Thrift Supervision, the proposed rules would address seven different credit card abuses: unfair time periods for making payments; unfair payment allocations; unfair interest rate increases on outstanding balances; unfair fees from credit holds; unfair methods of computing balances; unfair security deposits; and deceptive offers of credit.

The rules would also require banks to allow consumers to opt out of courtesy overdraft protection, the source of many overdraft fees, and it would prevent banks from charging overdraft fees when money is "held" by banks during debit card authorizations.

"It's about time federal regulators offered consumers some relief from unfair bank practices," said Consumers Union Financial Services Campaign manager Gail Hillebrand. "This proposed rule finally acknowledges that some practices just aren't fair. All the disclosure in the world can't make it fair to send the bill too close to the due date; to raise the interest rate on money already borrowed: or to charge a fee for a problem caused by the bank's practice to allow a credit hold or a debit hold."

Rep Carolyn Maloney, who has proposed legislation with similar bans, welcomed the proposal but urged Congress to move forward with a new law anyway.

"Just as we didn't wait for the regulators to deal with subprime mortgage reform, we shouldn't wait for them to deal with the pressing issues on credit cards," she said. "By the time they get around to finalizing these rules, they will be watered down and come too little too late to help struggling consumers."

When banks advertise new credit cards with low rates, the rules say, banks will have to spell out what requirements consumers must meet to receive the advertised rate.

The new rules would also clarify two rules governing bank overdraft policies. Banks would be banned from charging overdraft fees unless consumers are expressly given the chance to opt out of automatic payment of overdrafts. According to the proposal, consumers must be given "reasonable opportunity" to exercise that option.

Last year, consumers were assessed more than $17 billion in overdraft fees, according to the Center for Responsible Lending.

Consumers Union cautioned that while the proposal offers hope for new credit card rules, consumers must be vigilant and make sure the rules eventually become law.

"The credit card rules are real progress for consumers, but the details will be very important, and there is much more to be done by both the agencies and Congress," said Hillebrand. "It's time to end all of the abusive credit card practices that trap Americans in debt."

Regulators, most notably the Fed, have been under pressure from politicians to do a better job of overseeing the banking industry in general or risk losing some of their regulatory powers. At the same time, lawmakers have pushed to make the credit card industry more consumer friendly at a time when Americans struggle with debt and increasingly rely on their credit cards to make ends meet. U.S. consumers were saddled with $850 billion in credit card debt as of the end of last year, according to the Consumer Federation of America.

"The proposed rules are intended to establish a new baseline for fairness in how credit card plans operate," said Ben Bernanke, chairman of the Federal Reserve, which regulates many U.S. banks. "Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs."

Edward Yingling, chief executive of the American Bankers Association and a top financial services lobbyist, blasted the plan. "The Federal Reserve's proposal is an unprecedented regulatory intrusion into marketplace pricing and product offerings," Edward Yingling said.

The reforms will be subject to public comment for 75 days. The agencies expect to finalize any new regulatory changes by the end of the year.

Sen. Christopher Dodd, joined by other lawmakers, unveiled legislation on Wednesday that incorporated some of those same regulatory proposals and added some new ones such as preventing issuers from charging customers a fee to pay a credit card bill by phone.

Earlier this year, Rep. Carolyn Maloney, introduced a legislative plan dubbed the Credit Cardholders' Bill of Rights, which garnered attention at a House hearing last month.

The credit card industry claims the rules could limit credit. Card industry representatives have been quick to warn that the passage of new legislation or additional regulation could hurt all credit card carriers.

"We are deeply concerned that these rules will result in less competition, higher consumer prices, fewer consumer choices, and reduced consumer access to credit cards," said Yingling, the banking industry advocate. In short, everyday consumers will bear the real cost of these proposals.

People with bad credit histories, for example, may no longer have similar access to credit. At the same time, consumers with good credit could soon find themselves facing higher interest rates.

In the early 1980s, before issuers relied on credit scores in vetting customers, interest rates hovered around 18% and everyone paid an annual fee.

Nowadays consumers pay an average interest rate of just over 13%, and three quarters of card issuers do not charge an annual fee, according to the bankers group.

The consumer federation and the U.S. Public Interest Research Group said they were encouraged by the joint proposal, but added that regulators did not address other problems like unwarranted interest rate changes and aggressive marketing to college students.

"It's a good first step in addressing a number of abusive practices," said Travis Plunkett, legislative director at the consumer federation. "However, it will still be necessary for Congress to step in because the proposal only deals with a few of the problems that have been identified."

At the same time, legislators could have quite a fight on their hands. Previous efforts trying to reform the industry have largely failed, while recent legislative proposals have found little support among GOP lawmakers.