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New Credit Card Protections Take Effect Thursday

Consumers facing a retroactive increase in the interest rate on their credit card can lock in the existing, lower rate for up to five years after a new consumer protection law takes effect Thursday.

The new protection, part of the Credit CARD Act enacted by Congress three months ago, comes at a time when credit card issuers have been aggressively raising interest rates.

The median interest rate, based on rates charged by the nation's top 400 credit card issuers, increased from 9.99 percent in December to 11.99 percent in July, even though the interest rate the Federal Reserve charges banks dropped over the same period, according to Elemi Constantine of the Pew Safe Credit Cards Project.

"Banks are choosing to charge their customers more, even as the cost of money has gone down," Constantine said.

However, a spokesman for the American Bankers Associated pointed out that losses attributed to cards more than six months in default increased from 6.4 percent of balances in the fourth quarter of 2008 to 9.55 percent in the second quarter of this year.

"This is card issuers adjusting to market forces," said ABA spokesman Peter Garuccio. "Let's not forget, all types of lending involve risk. When you are talking about credit cards, those risks are magnified because there's no security backing up the loan."

Starting Thursday, card issuers must give consumers at least 45 days' notice of a pending rate increase.

"That gives consumers a little time to shop around for another card," Constantine said. "Should consumers choose to move to another card or just to close their current account, they can choose to reject the rate increase and effectively convert any existing balance to a closed-end loan that they can pay off at the current rate for up to five years."

Until now, card issuers have been able to charge higher rates - even on closed accounts - until a balance was paid in full.

Also beginning Thursday, credit card issuers will be required to mail their bills at least three weeks before they are due. The previous requirement was 14 days.

Most of the new consumer protections, including a ban on retroactive interest rate increases, won't take effect until Feb. 22. And consumer protections affecting gift cards won't take effect until August 2010.

The Pew Safe Credit Cards Project also found that the lowest introductory rates advertised by card issuers have increased. In July, the median rate was 8.75 percent in July, up from 5.99 percent in December, according to Pew.

Pew plans to release more details of its survey next month.

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