Fed says no to freeze on credit card rate hikes

05.06.09
By Sarah Beldo

An effort by two lawmakers to extend protection to credit card customers before upcoming legislation takes effect was denied by the Federal Reserve this week.

Senator Charles Schumer and Senate Banking Committee chairman Christopher Dodd had written a letter to the Fed last month asking for an immediate termination of unexpected rate increases on existing balances.

In their letter, they asked Fed chairman Ben Bernanke to use "emergency powers" to help shield ordinary Americans from the "outrageous" practice in which issuers raise rates on existing balances retroactively.

They also suggested that some credit card companies were taking a more aggressive approach to hiking rates in anticipation of the passage of new legislative reform.

But Schumer told Reuters on Tuesday that their request had been denied. Responding to the request, Bernanke expressed concerns that banks would respond to the action by restricting consumer credit even further.

Schumer called the decision "unconscionable."

"The Fed has acted swiftly to use its emergency powers to steady teetering financial institutions," Schumer told the news provider. "It is fair to ask why they won't use the same powers to aid American families who are at just as great a risk."

Meanwhile, Bernanke said at a hearing of the Joint Economic Committee that the U.S. economy seems to be reaching a more stable point and may even begin to recover later this year.

Still, he cautioned that more layoffs are likely and that access to loans of all types will probably remain tight.

The most recent Federal Reserve survey of senior loan officers reveals that nearly 60 percent say they have tightened lending standards on credit cards, while 55 percent say they have raised the minimum credit score required to obtain a card.

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Anticipation of the new legislative reform may cause some credit card companies to make more aggressive rate hikes.