That’s right! It’s not a typo.

The Federal Reserve Board put in a proposal on Monday that would prevent credit card companies from increasing consumer rates on existing debt for ANY reason other than default. This proposal also seeks to get rid of double-billing and many of the other unsavory credit card practices that we’ve talked about within this very blog.

It seems that Congress is quite concerned with the amount of credit card debt in the U.S. - remember it’s in the billions! There has been a political firestorm on Capital Hill, with many of the bills introduced having the elimination of risk-based pricing as the focal point of action. While the banks and credit card companies continue their lobbying and opposition of such bills that suggest government regulation of the industry, many experts and insiders are suggesting that an all-out change is inevitable. The financial industry, especially the credit card side, is going to change and credit card companies will no longer have full control over their pricing and practices.

As it stands, card companies are allowed to use outside factors to increase a rate on existing debt, including defaults with other creditors, an overall decline in creditworthiness, and any other factors that deem a customer to be a risk. But, under the new proposed plan, card companies will not be allowed to use risk-based pricing on existing debt and will have a number of other restrictions placed on them as well.

The Fed intends to restructure payment allocation rules in addition to cutting risk-based pricing. Currently, card companies apply payments to the lowest interest rates first. This practice effectively keeps many consumers in debt and certainly needs restructuring. There has been no word on the specifics of how the Fed intends to restructure this policy; however, it is likely that Rep. Maloney’s bill in which she would require the card companies to distribute the payments proportionally to different interest rates, will be used as it is in the best interest for all parties involved.

The Fed has come under heavy criticism in recent years for allowing the practices of card companies to go rampant and now they’re taking it to heart. After all, cutting interest rates can only go so far given the state of the economy. With so many loan defaults, it’s been suggested that the Fed look at other options to help stimulate the economy and now we’re seeing a solid action plan being put into place. However, it is unclear just how aggressive this new proposal will be.

Unfortunately, the Fed’s new proposal could have some adverse consequences for consumers.

Ken Clayton, the director of American Bankers Association’s Card Policy Council, says that such sweeping changes could bring back a wider use of annual fees and increase interest rates across the board. Say goodbye to the days of 0% interest and unlimited rewards! Clayton says that if the Fed takes away their ability to price based on risk factors, to charge interest on a loan, and to simply price their product in general, the reality is that it will have to be dealt with in a different way. That means higher prices and less access to credit.

Consumer advocates don’t think Clayton’s claims of increased pricing will amount to anything more than threats, but they could become a reality. Credit card companies are in the business of making money and the bills that have been introduced, if passed, will effectively cut into the profit they have seen in recent years. As with any business, they aren’t likely to just let that pass. Ultimately, there will be consequences for regulating risk-based pricing, double-billing, and how they apply payments to the interest. The question is; would the end result be marginally better than before?

I think so.