New credit card law brings worries of increased fees

A high-profile credit card law that will clamp down on companies takes effect next week as industry groups argue that it will increase costs for most borrowers.

Supported by most consumer advocacy groups, the bill won bipartisan support in the House and Senate as a way to increase consumer protection and fight abusive practices that can leave consumers heavily in debt. Sen. Chris Dodd (D-Conn.), the bill's main backer in the Senate, has touted the measure in his tough re-election campaign.

Starting Thursday, card companies must give 45 days notice on any significant changes and give card holders the option to pay off the balance over time at the original rate. Companies must also mail statements at least 21 days before they're due before charging late fees or taking other action.

Those changes are the first of many that will be implemented in several stages stretching into 2010.

“This represents the most important reform to credit cards since the invention of the credit card," said Nessa Feddis, senior vice president at the American Bankers Association (ABA). “It fundamentally changes the business model. Card companies will have to dismantle their existing models.”

Feddis said that a broad array of borrowers and cardholders will be affected by new rules that will increase the cost of credit.

“It's not just people with bad credit history,” Feddis said. Card companies, she said, will likely experiment with changes to annual and cash advance fees, as well as promotional offers.

Thursday’s new rules come as banks and card issuers have been slammed by lawmakers and other critics for taking in tens of billions of dollars in overdraft fees and increasing rates.

“Banks should make their profits off of their investments, not by abusing customers struggling with the economic recession,” Dodd said recently.

The Obama administration supports the creation of a new federal agency to oversee consumer financial products, such as credit cards. The agency proposal has sparked a major lobbying battle, with financial services groups arguing that it would hurt financial innovation and cripple business.

House Financial Services Committee Chairman Barney Frank (D-Mass.) said lawmakers will debate the proposal after the August recess.