Millions of Americans have been told their credit card terms are changing for the worse this year.  The only way to ward off the changes -- such as higher interest rates -- is to put the card on ice and stop using it.

Meanwhile, more than 100 million credit and debit card numbers have been stolen recently, and unauthorized credit or debit card charges hit nearly one in 10 consumers every year. This can make for a toxic combination.

Steve Abshagen got one of the unhappy notices from Bank of America in March, indicating his interest rate was going to jump from 9.9 percent to 14.95 percent.  Abshagen was a former MBNA customer until Bank of America acquired that firm's credit card users, and the change came as a surprise. While he carries a "five-digit balance" on the card, he says he's never missed a payment. BofA hiked his rate anyway, in a change that would have cost him about $850 more per year in finance charges.

But Abshagen reads his mail carefully, and spotted the customary "opt-out" alternative offered by Bank of America.  He could decline the change in terms and agree to pay off his balance at the lower rate, as long as he never used the card again.  Abshagen took that option, mailed in his opt-out notice, and began using a different card for new purchases.

All was well until last month, when Abshagen received his monthly statement from the bank. His minimum payment had jumped by $75, and his interest rate was raised to 14.95 percent.

The reason? An unauthorized charge to his credit card.

Abshagen says he made a purchase at Amazon.com and while he entered his new card to
complete the transaction, Amazon accidentally charged his old card, which the site held on file from previous purchases. 

He noticed the charge immediately and had it reversed, but it was too late. That single transaction had triggered acceptance of the higher rate, according to Bank of America, and now he was on the hook for a 50 percent interest rate increase.

Abshagen got on the horn to Bank of America, but the company offered little help.

"The woman was pleasant and she told me she could request from another department that they lower my rate, but she could not promise anything," he said.  She couldn't even give him an answer, he says.  "She said that if the request was successful the lower rate would show up on my next statement." In the meantime, he'd have to pay his current bill, she said.

That seemed unfair to Abshagen, who didn't want to make the higher payment. He threatened to withhold any payment to the firm until the matter was resolved. The call ended in stalemate.

"I refuse to pay a cent on this card until I receive a note saying they've given me the lower rate," he said. "They're the ones who violated the agreement, not me."

When asked to investigate the matter by msnbc.com, Bank of America spokeswoman Betty Reiss told msnbc.com that she couldn't comment on individual consumer's accounts for privacy reasons.

She did say, however, that the bank's policy holds that unauthorized charges should not cause a customer's rate to increase -- and that Abshagen's lower rate had indeed been restored.

"If we determined there was a charge that is unauthorized we would reinstate (the customer's) opt-out status, which is what we did in this case," she said.

Abshagen said he received a call from a Bank of America representative indicating his lower rate had been restored a few minutes after msnbc.com's inquiry.

RED TAPE WRESTLING TIPS
Consumer Union attorney Gail Hillebrand said Abshagen was lucky to have a happy ending, mostly because he was diligent about reading his bills.

There are dozens of ways that consumers can lose their opt-out status -- and get socked by higher rates, she said.  Many consumers link automated monthly bill payments to their credit cards -- such as cable TV service, Internet service, or even mass transit system payments. Even one missed charge could trigger the higher rate. 

"That can be a pain. You find yourself asking, 'What's my login so I (can) stop payment?'" she said. "You'll have to know what all those bills are."

A refund credit to the card could also trigger new terms.  And of course, so could a thief's unauthorized purchase. Earlier this month, the Justice Department announced that a single suspect had led a crime ring that stole about 130 million credit cards, nearly one for every adult American consumer.  A study by security firm Gartner indicated that 7.5 percent of consumers were hit by ID fraud last year, with most victims of credit or debit card fraud.  Given the widespread prevalence of interest rate notices and identity theft, it's likely more consumers will find themselves fighting to restore their opt-out status, Hillebrand said.

"Just as a matter of decency, the bank should restore the rate in that case. Of course, with banks, you can't count on decency," she said.  Consumers in this situation should file an identity theft affidavit with the Federal Trade Commission and file a police report, and send a copy of both to the credit card company as a plea to restore the opt-out status and the lower rate.  She urged consumers to also write to the Federal Reserve, which is right now developing new rules for consumer rights when credit card companies change their terms of service, and recommend that the agency make it easy for consumers to avoid new terms and higher rates.

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Steven Lobdell points out an image on Chase bank's Web site that says "Welcome WaMu customers. We're here for you."

But, apparently not for him. Lobdell is one of a group of former Washington Mutual credit card customers who were abruptly dumped by Chase in recent days. He holds two Chase cards; both were canceled as of July 15.

"It's kind of ironic, isn't it?" he said. "I think Chase is two-faced....We were good enough for Washington Mutual, why not good enough for Chase?" Across the Internet, thousands of former WaMu customers are expressing the same outrage. They say Chase is dumping them as customers, despite their solid payment records.

JP Morgan Chase & Co. acquired Washington Mutual and its troubled portfolio of credit cards in September, at the height of the banking system collapse. While Chase has recently set about to tidy up the ranks of its credit card holders, consumers are bearing the brunt of the cleaning. Two weeks ago, Chase began forcing some customers to raise their minimum monthly payments from 2 to 5 percent. And now, it's cutting off some customers all together. Thousands of complaints from former Washington Mutual customers can be found on personal finance blogs all across the Web.

Lobdell took a long and winding road to become a Chase customer. He initially opened his credit card with Providian Bank, which was later acquired by Washington Mutual in 2005, which collapsed last fall, and Chase picked up the pieces. 

Lobdell, who had combined balances on the two cards of about $3,000, says he's never been late with a payment and doesn't understand why Chase would cut him off.

 "When I got the letter I called to ask why the account was closed, I was told it was because of information received from the Experian credit bureau," he said. When he looked at his credit report, nothing seemed out of order. Lobdell said he will be allowed to pay off the card at its current rate, but can no longer make charges with it.

24 percent default rate predicted
Chase officials refused to comment specifically about the complaints from former Washington Mutual customers. Spokeswoman Stephanie Jacobson would not say how many card holders were impacted by this latest round of notices, but instead offered only a generic statement saying the bank was reacting to market conditions and new regulations from Congress.

"As a responsible, careful lender, we constantly evaluate the risks and costs of funding credit card loans. We are also evaluating changes required due to pending regulations," she said. "When necessary, we make changes to pricing, terms or credit lines based on borrower risk, market conditions and the costs to us of making loans. These are factors we have always monitored and processes we have consistently followed."

For additional questions, she referred reporters to the company's quarterly statements.

Washington Mutual was one of the nation's top 10 card issuers when acquired by Chase, with about 15 million cards. Still, its operations were dwarfed by the nation's largest issuers, including Chase. Former Washington Mutual consumers have about $25 billion in outstanding credit card loans, compared to Chase's $150 billion.

Lobdell was sure that Washington Mutual customers were being targeted. The letter he received contained the cryptic label "WaMuClosure1" at the bottom of the note.

He's seen notes from hundreds of other consumers in the same spot. "Reading these same stories, over and over, makes one wonder how Chase can get away with this."

A possible reason that Chase would pick on WaMu customers is contained in the company's second-quarter earnings announcement. While Chase said it anticipated losses of about 10 percent on its credit card portfolio, it predicted losses of up to 24 percent from its former Washington Mutual customers. Prior to its collapse, Washington Mutual targeted subprime borrowers, a group that's more likely to default on loans.

Losses of that size would be a shock to Chase's balance sheet. When Chase acquired Washington Mutual's assets for $1.9 billion last fall, it said it anticipated credit card losses in the 8 percent range. 

Lobdell holds other credit cards, so the cancellation does not put him in immediate dire straits. It will mess with his credit report for years to come, however. It now contains two notations that indicate "account closed at creditor's request." He'll get two dings to his credit score because his available credit has shrunk. 

"Now if I try to get a car loan, it's going to show they closed my accounts," he said. 

FICO: Not a negative event
Craig Watts, spokesman for Fair Isaac Corp. – which controls the credit formula – offered soothing words for Lobdell and others in his same spot. Watts says the "closed at creditor's request" notation is not considered a negative event by the credit score formula.

"We see it as the same as if the consumer closed the account," Watts said. In other words, it will not hurt credit scores the same way an account labeled "delinquent" or "settled for less than full balance."

Of course, consumers are advised never to close their credit card accounts, because the loss of overall available credit will hurt their scores – and in this case, consumers have no choice in the matter. So consumers who've had their accounts closed by Chase will see their scores lowered. It's impossible to say by how much, because multiple factors contribute to the score, Watts said. 

To make matters worse, if consumers cut loose by Chase open a new card to replace their lost Chase card, that'll hurt their credit score, too. * "If you go apply for a card, the impact to your credit score is you will lower your score a little bit, but over several months, it will recover," Watts said. His advice to former Chase customers: pay off existing balances instead, and wait to open a new card, if possible. Consumers who are really worried about the impact of losing their Chase account should pay to get their credit score, he advised. 

Lobdell didn't have his score before Chase dumped him so he really has no way of knowing what impact it might have on him, or the price he may pay for credit in the future. But there is good news for him -- he bought a home two years ago, so at least he doesn't figure to be in the market for a home loan any time soon. His mortgage holder? JP Morgan Chase.

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Drowning in debt, like so many young college graduates in America, Sarah Fightmaster struggles to keep her chin up while credit cards and student loans drag her down. It all started, she says, when she applied for her first credit card as a 19-year-old college student so she could get a free DVD player. In this video, Fightmaster tells her own story.

Fightmaster, now a lawyer in Brooklyn, describes in this video how a family tragedy -- the death of a grandmother -- helped keep her afloat, thanks to an inheritance. Still, she struggles just to make her minimum payments on credit cards and loans.

With NBC producers Blayne Alexander, Hilary Guy, Sabina Mohan and editor Ed Eaves.

When President Barack Obama signs credit card reform legislation -- which should happen any day now -- that will be a great day for consumers.  The legislation represents the first significant upgrade to American consumer rights in a long time.  The bill has some real teeth -- it's much stronger than the original bill that's been floating around the House of Representatives for more than a year. Clearly, the president threw all his political power behind the effort to rein in abusive credit card practices, delivering speech after speech imploring changes and even calling issuers to the White House for a stern reality check.

Too bad the president is backing the wrong horse. 

While $39 over-limit fees are hideously unfair and deserving of legislative attention, the number that really needs attention is 649,917 -- the number of U.S. homes that entered foreclosure last quarter.

Credit card debt is not the most serious problem facing America today. Empty houses are. Sneaky late fees and arbitrary interest rate hikes are terrible -- but foreclosures and homeowners who are severely under water carry exponentially higher consequences.  For now, however, the Obama administration has decided to take the road more traveled. It has taken up the populist cause of credit card reform while abandoning dramatic mortgage market reform that Obama promised in October and again in February. 

I cheer the credit card bill, and frequent readers of this column know I have been urging those changes for many years.  I don't lightly surrender credit card issues as a top priority.  But last week, Obama quietly watched as efforts to give struggling homeowners help in bankruptcy court  died a legislative death. That was a mistake.

How did it happen? Ask Illinois Sen. Dick Durbin, the Democrat who first introduced Obama to the United States at the 2004 Democratic convention.

"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place," he told a  Chicago radio station recently.

Durbin is the Senate's bankruptcy reform champion. His proposal to allow mortgage rewriting by  bankruptcy judges was voted down 51-45 in the Senate, with 12 Democrats joining all Republicans in stopping the effort.  While those 12 senators -- including Arlen Specter of Pennsylvania, Max Baucus of Montana and Tim Johnson of South Dakota-- were the direct reason the legislation died, Obama offered no help. In stark contrast to his aggressive public stance on credit card reform, Obama was silent on mortgage/bankruptcy reform.

'A side show compared to the mortgage issue'
Adam Levitan, a Georgetown professor and bankruptcy expert, was disappointed that the administration chose to champion bank credit card reform over bankruptcy reform.

"Obama put his personal prestige on the line for the credit card issue ... and the shame of it is, while I support the credit card legislation, it's just not that important," he said. "It's a side show compared to the mortgage issue. But politically it's an easier sell."

Why is bankruptcy reform so important? Currently, consumers who declare Chapter 13 bankruptcy -- the kind where debtors repay their loans but get extra time and some debt relief -- find themselves before a federal judge who gathers all the debt-holders into a room and forges a compromise payment plan. Credit card firms, personal loan holders -- everybody takes a hit, based on what the debtor can realistically pay.

But currently, primary mortgages are exempt from the process. There's no way to reduce a mortgage loan in bankruptcy.  Mind you, mortgages on second homes can be reduced. So can loans for cars, boats investment properties, etc. Primary mortgages stand alone, outside bankruptcy courts.

Naturally, the banking industry likes things this way and has been fighting to keep primary mortgages out of bankruptcy proceedings.

The issue has rankled consumer advocates for decades, but it took front and center as the number of U.S. foreclosures skyrocketed in 2008.  Bankruptcy mortgage reductions – known by the pejorative term "cram downs" by the banking industry -- could help 1.7 million consumers avoid foreclosure, according to the Center for Responsible Lending. The mere possibility of a cram down also provides motivation for banks to work with consumers on voluntary modifications, because the bank might lose more in a bankruptcy filing.

In October, when Wall Street banks went looking for a $700 billion bailout from the U.S. Treasury, consumer advocates tried to seize the moment and exact bankruptcy reform in exchange for bailout money.  At the time Obama said the bailout bill was so urgent that it shouldn't be bogged down with the potentially contentious bankruptcy provision. He repeatedly said he supported the change, however, and that it would come. He repeated that promise in February, after taking office, when the administration sketched out its housing rescue plans.

But when bankruptcy reform died in the Senate, Obama was silent.

Levitan, the Georgetown professor, said Obama's failure to go to bat for bankruptcy cause could doom the administration's other efforts to help troubled homeowners. So far, the administration has decided to rely on voluntarily mortgage modifications from banks, augmented by incentives from the government in the form of direct payments to banks that complete modifications.  (See my colleague John Schoen's overview of the plan.)

"It's quite bad for consumers," Levitan said."The Obama plan was designed as a combination of carrot and stick. We are now left with only carrot and no stick. In some ways, it's the worst of all worlds."

Most consumer agencies, excited to have someone from "their team" in the White House, aren't making much noise about the bankruptcy issue. After years of feeling ignored, they are thrilled to get movement on the credit card issue. In fact, one consumer advocate I spoke to said she believed that Obama's abandonment of the bankruptcy reform was part of a strategy -- banks couldn't swallow both credit card and mortgage changes at the same time, she speculated, so he went with the easiest step first and plans to take on the harder issue later.  I hope she's right.

Levitan thinks changes in bankruptcy law might still be in the cards, but he interprets the events of the past few weeks differently.  The current administration, he says, is hoping to "muddle through" the housing crisis without making substantial changes to the mortgage market. 

"If an acute crisis can be avoided, they'll settle for that," he said. "The Obama plan was never super aggressive. It was always a mitigation plan not a solution."

Good, but tepid, market reforms
Additional housing market reforms that are being discussed in three separate congressional bills involve important, but minor technical changes to the market.  A House bill would prevent mortgage originators from selling off all their loans to investors, which would force them to keep "skin in the game," and provide an incentive to more carefully screen applicants. Lenders would have to keep at least 5 percent of their loans on the books, according to the bill's provisions. Part of the mortgage meltdown was blamed on originators dumping all their loans on under-informed investors, giving originators no incentive to avoid making bad loans.

This "skin in the game" provision won't work, however, if lenders are allowed to insure themselves against losses in these loans.

The same bill, the Mortgage Reform and Anti-Predatory Lending Act, would ban many kinds of early-payment penalties and prohibit lenders from steering consumers into higher-cost loans when they could qualify for cheaper loans.  The penalty provisions are weak though: Lenders would have 90 days to act after receiving consumer complaints, allowing banks to have what is sometimes called a "first bite at the apple."  The most profitable strategy for a bank would be to mistreat all customers, then modify loans for the few consumers who noticed and complained.

Kathleen Day, spokeswoman for the Center for Responsible Lending, says the legislation isn't perfect, but it's a good start.

"We wish it were stronger, but it's much better than the (legislation proposed last fall)," she said.  "At its core, this legislation provides that mortgage lenders may only make mortgages that a consumer can afford to repay."

The legislation, which is still working its way through Congress along with two other similar bills, will help many future homebuyers.  So will a new HUD-1 form, the key document consumers sign at mortgage closings, which take effect in place Jan. 1 The new form more clearly explains fees and other costs to purchasers.

But at its their core, these mortgage reform efforts aren't designed to help struggling borrowers much. They are left with the carrot-but-no-stick plan mortgage rescue plan.  So far little has been done to slow the national foreclosure rate, which doubled in the first quarter of this year, compared to last year. And it does nothing to help the one in five homeowners who live in a building that's not worth their mortgage. 

Perhaps Obama and his economic advisers have changed their mind on bankruptcy modification since his promises in October and February. There is a legitimate debate to be had about the bankruptcy option. Banks argue that allowing mortgage loans into bankruptcy would raise the cost of all mortgages and dramatically change the nature of contracts between consumers and banks.  Perhaps the administration now sees this issue the banks' way. If so, Obama's supporters, and consumers sitting in under-water homes, deserve an explanation.  Perhaps during all the predictable celebration and back-slapping about credit card reform, Obama could take a moment to address the empty home problem.

Few noticed on Christmas Eve when the news broke that electronic payment services firm RBS WorldPay had been hit by hackers who stole personal data on 1.5 million consumers. After all, that's small potatoes these days. But when Heartland Payment Systems announced on Inauguration Day that it had suffered a serious security breach, some experts noticed a pattern -- and not just the companies' standard penchant for releasing bad news on days while the public is distracted.

"I have heard that the payment processers are the main target for hackers now," said Avivah Litan, security expert at consultancy firm Gartner.

Heartland has not released an estimate of the number of accounts impacted by the attack, but Litan said it might be the biggest data leak ever: The firm handles 100 million transactions every month for 250,000 clients. Heartland has said it was alerted by Visa and MasterCard to a pattern of fraud on its networks last fall, but only discovered the security hole in its network last week . That gave hackers access to potentially hundreds of millions of transactions over several months.

The largest known data leak to date involved retailer TJ Maxx, which lost the data on 45 million credit cards in 2007. But this time, there are signs the haul, and the targets, might be astonishingly large.

In its release, Heartland said it was the victim of a "widespread global cyber fraud operation." CFO Robert Baldwin told the Wall Street Journal that the firm had been targeted by malicious software that was "light-years more sophisticated" than standard computer viruses. Those ominous statements, combined with the news about RBS WorldPay, suggests to Litan that hackers have now trained their relentless keyboards on payment processing firms.

Few American consumers have ever heard of Heartland or RBS WorldPay. But these firms -- and others including First Data, TSYS, and Nova Information Systems -- regularly capture and transmit personal information about nearly every American.

Payment processors handle credit-, debit- and gift-card transactions from the moment you swipe your card at a store until your bank debits your account and adds the money to the store's account. These are complicated processes -- the processor must make sure you have the money (or the credit limit) to afford the purchase, then tell your bank to send money to the store's bank. Often, third-party firms – such as software companies that manage store cash registers – add to the complexity.

Right now, consumers have no way of knowing if their data was stolen RBS WorldPay or the Heartland attacks; they may never find out. Retailers rarely advertise which payment systems they use. Heartland has said publicly that nearly half of its transactions come from restaurants, but has declined to identify its clients. It's also declined to identify consumers who might be victims.

That's where the data is
It makes sense for hackers to target processing companies -- that's where the most data is. A firm like Heartland has access to far more credit and debit card numbers on a given month than any single retailer.
But there's another factor that makes processors vulnerable, Litan said. While payment industry rules require that credit card data be encrypted while it's stored by retailers, processors, and banks, there is no requirement that the data be encrypted while in transit over private networks. That's a weakness which hackers have now targeted, she said.

Heartland isn't saying how a computer virus was able to get onto its systems. But once there, its makers would have had a fairly easy time sniffing out credit card data, Litan said.

"The likelihood is that there was malicious software sitting on a server (at Heartland) looking for transmissions that represented authorization requests, and then the malware would turn on and capture that data," she said.

In August of last year, Visa issued a warning to payment services companies predicting exactly that kind of attack.

"Visa has noticed an emerging trend in which computer hackers use packet sniffers to intercept and collect cardholder data," it said in a security alert sent to clients. "Recent investigations have uncovered evidence of packet sniffers being used by network intruders to capture payment card data as it is transmitted over the network during authorization. This threat involves compromising the system and then installing a sniffer program or installing a hardware sniffer. …. Once network intruders gain entry into a merchant's system, the packet sniffer programs are installed and can be difficult to detect."

Adding encryption tools would foil such packet sniffing, but doing so is a logistical challenge; all the various parties would have to agree on encryption key management. Still, Litan said, such a step would not be impossible -- and she criticized banks as "lazy" for not requiring encryption.

"They could do it. It's just very costly," she said.

Then again, so is a major security breach.

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Calling many credit card company tactics "unfair," "unreasonable," and "deceptive," federal regulators on Thursday unveiled sweeping new rules aimed at protecting consumers. They then invited card issuers to continue those unfair tactics for the next 18 months.

A 300-page report by the Office of Thrift Supervision described bank misbehavior in great detail, at times using stinging language. It then laid out updated federal regulations that will bar many such practices.

The new rules, for example, limit card issuers' ability to raise interest rates in the first year after they issue a card. They also severely curtail banks' ability to retroactively raise interest rates on consumers' existing balances, including penalties levied when the a payment arrives a few days late.

And card issuers won't be able to toy with "grace periods," as they have in the past. Instead, banks must give consumers at least 21 days to pay their bills, and they are prohibited from double-cycle billing, which retroactively applies interest charges to purchases made after a consumer fails to pay their bill on time.

The Office of Thrift Supervision report uses the term "deceptive" more than 100 times in describing the banks' practices and "unfair" more than 200 times.

But the three agencies cooperating on the rules -- the Office of Thrift Supervision, the Federal Reserve, and the National Credit Union Administration -- also gave the banks a generous grace period. The new rules will not take effect until July 1, 2010.

Linda Sherry, director of national priorities for advocacy group Consumer Action, hailed the rules as "great" for consumers, but sharply criticized the delay in their implementation.

"The fact that they are waiting 18 months in this economy is a disaster," she said. "That will give the credit card companies time to reprice their consumers and do all kinds of tricks. (Regulators) should have made it much shorter."

No ruling on overdrafts, over-the-limit fees
The regulators also decided not to make rules inhibiting banks' ability to hit card users with over-the-limit fees -- an issue of recent concern as many issuers lower consumers' credit limits. And the agencies removed provisions in their initial proposal in May, which would have restricted banks' ability to levy overdraft fees, another thorn in the side of consumers. Both issues can be reconsidered at a later time.

Despite such omissions, many of the most unpopular credit card tactics will be outlawed by the new rules. For example:
• Banks will have to send bills at least 21 days before payments are due, and midday payment- due cutoff times will no longer be allowed. When due dates fall on weekends, consumers also will be granted extra days to pay.
• When multiple interest rates apply to different types of balances on the same card, banks will be prohibited from applying payments in a way that maximizes interest charges. This is a common problem for those who utilize balance transfers. Transferred balances usually incur interest at very low teaser rates, but new charges are hit with a much higher rate. Traditionally, banks apply interest to the transfer balance, maximizing their return and effectively making a consumer swap out low-priced credit for high-priced credit. The thrift supervisors said banks make an extra $930 million each year by applying payments this way. When the new rules go into effect, payments must be applied evenly across all types of balances, or in a way that's more advantageous to consumers.
• Many banks now go back to the previous billing cycle when computing interest rates, a practice called double-cycle billing. For example, a consumer who fails to pay a bill due Jan. 5 will see interest charges levied on items purchased during December, even if that was a grace period. Once the new rules are in place, interest charges on average daily balances must be computed using only a single month's transactions.
• There are also many provisions for making credit card statements and terms easier to understand.

But the main gain for consumers is a prohibition on many kinds of retroactive interest charges that are routinely charged by credit card companies. Currently, consumers who have their interest rates hiked have their entire outstanding balance subjected to the new rate. For instance, a consumer who borrowed $2,000 for auto repairs 12 months ago, and is paying that back at 9 percent, could see the interest rate on that balance rise to 29 percent "at any time for any reason," according to most card issuers' terms of service. Regulators said banks make $11 billion each year through such retroactive interest charges.

Under the new rules, interest rate increases will only apply to purchases made after the rate hike takes effect for most consumers.

"So people who just kind of miss a payment by a few days will no longer get caught in this," Sherry said.
Consumers who are 30 days late, however, are not exempt from retroactive charges, making the penalty for letting accounts become delinquent quite severe.

The provision might lead to confusion, however. Already, many consumers have three different interest rates on a single credit card – one for purchases, one for cash advances and one for balance transfers. This provision would add a fourth rate, by creating a rate for "new" purchases and a rate for "old" balances.

While consumers cheered regulators through the process -- a record 65,000 comments were filed, most of them positive -- banks resisted the changes, saying the limitations would increase interest rates on good consumers and reduce the availability of credit. Edward L. Yingling, CEO of the American Bankers Association, warned that Congress should expect unintended consequences as the new rules take effect.

"While the new rules are designed to increase protections for consumers, the Fed itself has recognized that they may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history," he said. "With the uncertainty facing our financial system, it's absolutely vital for policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace."

'Monetary harm constitutes injury'
In its report, the Office of Thrift Supervision rejected many of the arguments put forth by the credit card issuers to try and fend off the new rules, including the suggestion that cardholders can avoid all interest and fees by simply paying their bills on time. Credit cards are designed as borrowing instruments, the agency reasoned, and consumers shouldn't be expected to avoid mistreatment only "by paying their balances in full each month."

It also rebutted one bank argument that provides some insight into credit card issuer strategies: that the agency does not have jurisdiction because no harm could be proven against consumers "merely because other, less costly allocation methods exist."

The Office of Thrift Supervision replied that "it is well established ... that monetary harm constitutes an injury."

Rep. Carolyn Maloney, D-N.Y., who has led the charge in Congress to enact similar protections through federal legislation, applauded the new rules. But she said there was still a need for her law, called the "Credit Card Users Bill of Rights." The legislation bill passed the House of Representatives earlier this year, but a companion bill stalled in the Senate.

"As one who's been working for years to bring consumers the protections they need, I'm delighted to see the regulators take substantive action," she said. "Finally, these practices have been declared what they are: 'unfair' and 'deceptive. But while these new rules are a strong first step, I'll be working with (Congress) to fill any gaps in protections for cardholders. These new rules aren't scheduled to take effect until 2010; Congress should act sooner to protect American consumers."

Dire times are coming for consumers who hold credit cards and the banks that issue them, according to a report released Tuesday.

The report by the research firm Innovest Strategic Value Advisors, titled "Credit Cards at the Tipping Point," predicts that fallout from the credit crunch will lead to a sharp increase in credit card defaults in the coming year, making $1 out of every $10 owed on credit cards impossible to collect. That will force banks to write off nearly $100 billion in credit card debt, it said.

"A long build-up in consumer indebtedness, deteriorating economic conditions and a potential 'sudden stop' in credit availability could cause charge-offs to rise dramatically into 2009," the report says.

Misleading practices by credit card issuers will come back to bite them, say report author Gregory Larkin and Laura Nishikawa, as uninformed consumers who wind up facing surprise interest rate hikes and fees will be more likely to default on their loans. The report concludes that Capital One is most at risk, due in part to its aggressive marketing and "fee-trapping" strategies.

"The data points to an unsustainable business model based on penalty pricing, and the company is worst-in-class by Innovest standards," the report said.

Innovest is an international research firm which analyzes companies based on environmental, social and corporate soundness; it was among the first to criticize the subprime mortgage lending business and downgraded now-defunct Bear Stearns in 2006, when its stock was still riding high.

'Credit card business is exceptionally resilient'
A spokeswoman for Capital One said she hadn't seen the report and was unable to comment on it, but pointed towards reassuring comments made by CEO Richard Fairbank at a recent equity analyst conference.

"In our U.S. card business, we're taking many actions to navigate the current downturn," he said. "The credit card business is exceptionally resilient, with high risk-adjusted margins and a business that doesn't suffer the issues of collateral value that currently plague in particular the mortgage industry."

But charge-offs at Capital One have already reached 6.3 percent and are climbing rapidly, according to the Innovest report.

Meanwhile, there are plenty of other indicators of looming trouble for other credit card issuers, according to the authors, who also analyzed Bank of America, JP Morgan Chase, Citigroup, Discover and American Express.

As previously reported, card issuers are lowering consumer credit limits and discontinuing balance transfer discounts in an attempt to reduce their risk from consumers who may be unable to pay their bills. Many consumers who may have considered tapping home equity to pay off their credit cards can no longer do so.

One obvious sign of coming distress for the credit card market: In a recent Federal Reserve survey cited by the report, 83 percent of major credit card issuers said they had tightened their lending standards, compared to 45 percent just three months earlier.

Borrowing more, paying less
But efforts to limit exposure may have come too late.

Data collected by Innovest shows that many borrowers are already running higher balances and making smaller monthly payments. Only 1 in 5 Citibank customers pays bills in full each month; fewer than 1 in 10 Bank of America customers do so, and rates of full payment are dropping at both firms. Meanwhile, the average balance at Citibank is up 20 percent compared to last year.

"This could be an early sign of borrower distress, which could lead to higher delinquencies in the next few quarters and higher loan losses moving forward," the report says.

Bank of America already has acknowledged trouble in its credit card business. On Oct. 6, the firm said in its earnings report that it would write off $1.24 billion in credit card losses in its third quarter, roughly 50 percent higher than the previous quarter.

"We've seen, even in the last 45 days, things worsen," CEO Ken Lewis said during a conference call with analysts.

Larkin and Nishikawa say that the worst of the credit card defaults may still be a year off, as credit card debt isn't discharged until 60 days after completion of a bankruptcy case, or 180 days after nonpayment.

"The high charge-off rates today are in part reflecting economic troubles from two quarters back, and that the full extent of the current pressure on borrowers will only be felt in 2009," the report said.

Other details from the report:
• Outstanding credit card debt has grown by more than 75 percent since 1999.
• Risky borrowers with low credit scores -- subprime borrowers -- account for roughly 30% of outstanding credit-card debt.
• Washington Mutual (now JP Morgan's headache) had the highest subprime exposure of major lenders, with 48 percent of receivables held by subprime borrowers. By comparison, about 30 percent of receivables at Capital One and Bank of America are owed by subprime customers.
• More than 50 percent of Capital One's cards are "low-limit" cards, which Innovest said are designed as fee traps -- consumers with low limits are more likely to surpass those limits and face penalty charges. (CEO Fairbank maintains that low-limit cards are simply a smart way to manage risk)
• Perhaps not coincidentally, Capital One received the most complaints during the last year among credit card issuers at the Better Business Bureau -- nearly 8,000. JP Morgan, by contrast, received only 273.
Despite its grim tone, the report notes that even a worst-case scenario collapse of the credit card market would not damage the overall economy the way the housing market meltdown has; it's simply a much smaller problem. The U.S. mortgage market, with about $11 trillion in outstanding loans, dwarfs the credit card market, with about $1 trillion in outstanding balances.

Credit card debt and mortgage debt are two sides of the same coin on the American personal finance landscape. And now, it appears they are poised to become a two-headed monster. Consumers with credit card debt can expect to feel the walls closing in on them in the coming months, as card-issuing banks search for creative ways to cut back on risk and raise cash.

On Tuesday, msnbc.com reported on a new policy at American Express that allows the firm to penalize consumers based on where they shop and which bank holds their mortgage. Given the tenuous state of the credit card-issuing business, expect other issuers to follow suit, if they haven't already. Experts say consumers also should expect their credit limits to be lowered for what might seem like arbitrary reasons and their balance transfer fees to climb.

"Consumers are probably not accustomed to that but we live in a new world," said Carol Kaplan of the American Bankers Association, explaining the new caution among lenders. "(Banks) have suffered a lot of losses and they are doing whatever they can to reduce risk. They have people that work all day and all night who try to come up with new formulas to assess risk."

Some elements of those formulas might surprise you. Few consumers would consider the credit limit implications of the stores they shop at -- and in fact, they can't, as American Express wouldn't tell MSNBC.com which stores it deems as "risky." Still there's nothing illegal about the practice, and with losses mounting, it's not surprising that card issues are resorting to new tactics.

In the first quarter of 2008, banks charged off 4.7 percent of credit card loans, a 33 percent increase from the first quarter of 2006, according to the Center for American Progress. That timing is no coincidence; that's when easy credit for home equity loans dried up. In 2009, according to consulting firm Innovest StrategicValue Advisors, banks will charge off nearly $96 billion in credit card debt, double the projected 2008 losses.

That's why credit card issuers are running for cover.

"Delinquencies and defaults are soaring," said Robert Manning, author of the book "Credit Card Nation."

He said believes some major credit card issuers might not survive the current crisis. "They suspended the financial laws of gravity and put individual households on steroids," he said. "... Now (banks) don't really know what to do."

One thing they are doing, said Bill Hardekopf, who operates LowCards.com, is finding excuses to lower consumers credit limits.

"What issuers do is tighten up standards of how they analyze risk," he said. The simplest way to reduce risk, he said, is to reduce credit limits. Card issuers never reveal their strategies publicly, so it's never immediately obvious what's happening behind the scenes, Hardekopf said. But he believes efforts have begun to systematically reduce some users' credit limits, akin to a quiet change earlier this year which saw many cardholders' interest rates mysteriously rise.

Asked if Bank of America is using new criteria to lower credit limits, spokeswoman Betty Reiss said, "We adjust credit card limits based on the individual cardholder's risk profile and performance with us." She declined to answer additional questions. Capital One and JP Morgan Chase did not respond to requests for interviews.

But based on anecdotal reports, Hardekopf said, "What they seem to be doing is sending out notices saying they are lowering credit limits."

Because of card agreements, credit card issuers cannot simply close accounts and demand full payment. But they can do the next best thing: Raise the cardholder's interest rate. They can also lower credit limits repeatedly to prevent a consumer from making any new purchases. That's effectively the same thing as closing the account.

Lower limits can hurt consumers in myriad ways. Consumers with a balance that's over the limit -- even if that occurs as a direct result of a shrunken credit limit -- face over-limit fees and can see their interest rate raised to the "default" rate of 32 percent or more. Lower limits also hurt credit scores. Credit utilization is a key component of credit scores, accounting for about one-third of the magic formula that generates that score. Consumers who carry a credit card balance that's more than 30 percent of their credit limit are punished by the credit score formula, Hardekopf said. Credit score expert John Ulzheimer suggests an even more agressive goal -- he says cardholders should try to keep their credit usage down at around 10 percent of their credit limit.

Tim Westrich, who researches credit card debt at The Center for American Progress, said cardholders won't really know for some time what to expect.

"We just don't because we've never been in this situation before," he said, adding that he is particularly concerned about small-business owners who use credit cards to fund weekly operations.

Manning predicted the credit card crisis in his 2001 book, "Credit Card Nation." In it, he described the see-sawing of personal debt between credit cards and home loans, with skyrocketing home prices enabling consumers facing big credit card bills to simply take out a low-cost home equity loan or cash-out mortgage refinance. But with the market for home loans all but gone, credit card debtholders have nowhere to turn.

As a result, overall credit card debt has climbed 4.1 percent since 2006, according the Center for American Progress.

During the glory years, banks pulled in immense amounts of fee-based revenue from credit card accounts. According to research firm R. K. Hammer, credit card issuers raised about $17 billion in 2006. Congress' General Accountability Office said in a report that one-third of all cardholders paid at least one late fee last year.

AmEx rates credit risk by where you live, shop

Card issuers also used the same tricks as mortgage issuers to expand their empires, rolling their loans together and selling them off as asset-backed securities on Wall Street. Moving debt off their balance sheets allowed major issuers like Capital One to operate aggressive customer-acquisition campaigns. Meanwhile, investments in "credit card receivables" were a cash cow for investors.

But now, Congress is scrutinizing banks' fee-happy habits. Just last week, the House of Representatives passed the Credit Card Holders Bill of Rights, which limits the fees banks can charge. The timing couldn't be worse for card issuers.

"Now is not the time to be attracting the attention of Congress or regulators," making it unlikely that the issuers will dare to raise fees to get out of trouble, Manning said.

And they can't turn to Wall Street for help, either. The market for credit card securities is drying up, caught in the same swirl that is dragging down mortgage-backed securities, Manning said.

"This is a double financial bubble that's bursting," Manning said. "There is no way these receivables can perform."

That leaves card issuers with only one option: reducing their exposure to risky consumers any way they can.

RED TAPE WRESTLING TIPS
Consumers should expect credit card issuers to behave like wounded animals in the upcoming months. Given the desperate state of some issuers, consumers should be even more vigilant than usual. Notices of credit limit adjustments or interest rate hikes can be easy to miss.

"They can look like a piece of junk mail," Hardekopf said. "But if (banks) lower your credit limit and you don't notice, you can blow by it," he said. He urged consumers "not to do anything to raise your credit risk or (lower) your credit score," as card issuers will be looking for any excuse to raise rates.

Legislation that would ban many unpopular credit card company tactics has been passed by a congressional committee, opening a path for the so-called "Credit Card Holders Bill of Rights" to be considered by the full House of Representatives.

The bill, which was approved by the House Financial Services Committee last week, would prohibit many triggers that cause consumers to pay fees and higher interest rates. For example, it would stop card issuers from imposing higher rates retroactively on outstanding balances in some situations. The legislation was approved by a healthy 39-27 majority despite spirited lobbying against it by the banking industry.

The legislation is nearly identical to a set of new rules proposed in May by banking regulators, including the Federal Reserve. Those rules are still under review, with the public comment period ending Monday. The regulations face several additional hurdles, including a public hearing, though the Fed could wrap up the process by the end of this year.

If passed, the House bill might offer quicker relief to consumers , as some of its provisions would take effect immediately.

But the legislation faces an uphill climb on Capitol Hill. There's only about a three-week window for new business when the House reconvenes in September. Should the credit card bill find its way to the top of the House legislative agenda, and win approval, a similar bill sponsored by Sen. Christopher Dodd, D-Conn., would have to be passed and then aligned with the House bill. Finally, the legislation would either have to be signed into law by President Bush in the waning days of his administration -- highly unlikely -- or his veto overridden by Congress, also unlikely.

'Will help level the playing field'
Still, passage of the bill was heralded as a major victory for consumers by the bill's sponsor, Rep. Carolyn Maloney, D-N.Y. Her office said it was the first legislation with consumer credit card protections ever approved by a congressional committee.

"This landmark legislation will help level the playing field between card holders and card companies, and give consumers the tools they need to responsibly manage their own credit," she said in a statement. "The substantive reforms in this bill are needed now more than ever. ... If unfair credit card industry practices continue to go unchecked -- just as subprime mortgages were -- it will have far-reaching and detrimental effects on families and the economy."

The American Bankers Association, which opposed the legislation, urged House members to let the bill die, saying regulators should be allowed to continue their review process.

"By incorporating into statute the 'initial' proposal on credit cards put forth by regulators ... the committee has denied itself the benefit of valuable public input and agency expertise on the potential consequences of such proposals," the ABA said in a statement. "A deliberative agency rule-making process would provide this benefit and would avoid bad policy results that harm consumers."

But Maloney said that legislating credit card rights is the only way to ensure that consumers are protected.

"Legislation is the only lasting solution to this problem," she said. "The Fed's work doesn't diminish Congress' responsibility to act in the best interest of our constituents and pass meaningful reforms that bear the force of law." She also said that the Fed's new rules could be watered down by the time they are finalized.

Lauren Zeichner Bowne, a lawyer for Consumer Reports and advocate of the Fed's rule change, said the credit card legislation serves as an important backup and encourages regulators to stick with their rule-making process.

"It encourages the Fed not to back down and make the rules any less strict," she said. "That's why we're pushing both." There's also a risk that regulators might go through several rounds of revisions, each requiring lengthy public comment periods, which could bog down the rules changes, she said.

Key provisions in the Fed rules and the legislation are:
• Credit card companies are required to give cardholders 45 days notice of any interest rate increases.
• Retroactive rate increases are prohibited, unless the card holder is more than 30 days late.
• Billing statements must be sent 25 calendar days before the due date under the legislation; the new Fed rule varies slightly, requiring 21 days.

The banking industry argues that any restrictions on the way it prices credit will increase costs for all consumers, including those who always pay their bills on time.

"Things that appear attractive on the surface often come with too high a price tag," the ABA's statement said. "If lenders are limited in their ability to adjust interest for customers whose risk levels may have changed, they will have to account for the increased risk by raising prices for everyone. That's unfair."

Consumers have taken an active interest in the debate. The Fed has received 15,600 comments on its proposed rules, and another 27,000 comments that appear to be form letters.

Credit card protections have also played a minor role in the presidential campaign. Sen. Barack Obama has proposed his own Credit Card Bill of Rights that would offer additional protections to consumers, including elimination of interest charges on fees. He has also proposed a five-star rating system for credit cards that would direct the Federal Trade Commission to evaluate credit cards and rate them on their consumer -friendliness. The McCain campaign has issued no specific credit card rules.

Federal regulators are taking a stab at reining in "unfair and deceptive" bank tactics. Three federal agencies, including the Federal Reserve, have issued proposed rules that would ban consumer-unfriendly credit card issuer practices like double-cycle billing and unfair interest rate hikes. Some unpopular bank overdraft fee policies would also be banned.

The Office of Thrift Supervision announced its proposals Thursday. 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 (D-N.Y.), 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."

The regulators have taken aim at some practices that are particularly irksome to consumers. One new rule would require banks to make sure cardholders have a "reasonable" amount of time to make their monthly payments, forcing banks to ensure that statements are mailed or delivered at least 21 days before the payment due date.

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.

When consumers have multiple rates on different balances on the same card -- often the case when cardholders have used balance transfers to open new cards -- banks would be forced to apply partial payments in the way that is most beneficial to consumers. Currently, most banks use payments to reduce the balance with a lower interest, which allows banks to collect more revenue from the higher interest balances.

Double-cycle billing, which allows card issuers to charge interest on purchases dating back two months in some situations, would be banned.

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.

Also, a little-known cause of overdrafts -- debit card "holds" -- would be eliminated. Many consumers don't realize that when they use their debit cards to make certain purchases which require pre-authorization, such as gasoline, the retailer often widely overshoots the value of the transaction to ensure the consumers' bank account has enough money to cover the purchase. Gas stations routinely block off $50 to $100 at the beginning of a gas purchase, for example. Even if the consumer ultimately only buys $10 in gas, the pre-authorization of $100 results in a $100 "hold" being placed on the account for several days. Travelers driving off in rental cars can discover holds of up to $500, placed to ensure the consumers' card can cover potential damage to the car.

While the holds are generally invisible to consumers, they do result in overdraft fees. The new federal regulations would prohibit overdraft fees resulting solely from debit card holds.

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."

A Catch-22 for consumers came sharply into focus Thursday at a testy congressional hearing on a proposed Credit Cardholders Bill of Rights, with several witnesses testifying that they were hit with hidden penalties simply for shopping around for better rates.

Banks often answer complaints about alleged misbehavior by saying that unhappy consumers can simply switch to a new bank. But Steve Autrey, a consumer from Fredricksburg, Va., testified before the House Financial Institutions and Consumer Credit Subcommittee that opening a new credit card and closing an account both hurt your credit score. That leaves consumers faced with sudden, unexplained interest rate hikes with no good options, he said.

"It's an unchallenged scheme where consumers are penalized when they choose to close their account," he said.

Autry said the "fixed" 9.9 percent rate he had on his Capital One credit card for seven years was increased to 15.99 percent in 2007. He complained that he has yet to receive an explanation for the increase, even though he asked for one last year. In a letter, Capital One stated simply that the business environment had changed, he said.

"I assumed that fixed meant fixed," he said. "...These unilateral, or one-sided agreements are unfair. What if my business environment had changed? Could I write them a note saying, 'I'm going to cut the interest I pay to you by half?'"

When asked why he didn't close the account and move to another issuer, Autrey replied that "It's just not that easy."

Credit counselors and financial experts often advise clients that closing a credit card account is among the most self-destructive steps a consumer can take because it always negatively affects their credit score. Autrey said he was advised against it by his mortgage broker last year when he was applying for a home loan. He was also advised against opening new credit cards, because that too would ding his credit score.
Autry's testimony – and testimony from several other consumers frustrated by credit card issuers practices -- was delayed last month when banks demanded that the consumers sign a waiver allowing company officials to discuss private account information in public. With a compromise in place that limited the disclosure, three consumers returned to testify Thursday.

In a rebuttal to Autry's testimony, Capital One said that he was provided clear notice of the interest rate change and given the opportunity to pay off the balance at his old rate, as long as he never used the card again.

Don't go near the edge
Another witness, Susan Wones of Denver, complained about a different Catch-22. She said her interest rate jumped on her Chase credit card from 15 percent to 25 percent when her balance grew to near -- but still under -- her credit limit. Because Wones was running short on available credit, Chase considered her a higher risk and raised her rates, even though she was making her payments on time. That made Wones wondered what the point of a credit limit is.

"I don't think it's fair for me to pay my bills on time under the rules set forth and have me be penalized for that," she said.

Autry complained about the same practice.

"You are not allowed to use up to the credit limit," he said. "You have to leave some room. It seems to be a trap."

Chase issued a statement saying that Wones' overall credit profile had "deteriorated," and her rate was raised under standard Chase policy at the time. The policy, called universal default, has since been eliminated by Chase -- but Wones' interest rate increase was not remains.

Retroactive interest
Another practice criticized at the hearing involves the retroactive imposition of rate increases on existing credit balances. When consumers carry a balance -- as nearly 50 percent of cardholders do -- and their rate is increased, the new rate applies to the entire balance, even that portion that was borrowed under the lower interest rate. The Credit Cardholders Bill of Rights, introduced by Rep. Carolyn Maloney, D-N.Y.. would ban that practice.

"The core principle of my bill is that cardholders should not be trapped by interest rate increases they did not agree to and that are applied retroactively to their existing debt, causing it to balloon," she said. "I believe it is a much-needed correction to a market that has gotten wildly out of balance."

Risk pricing defended
Not all federal regulators who testified at the hearing agreed, however. Julie Williams, chief counsel for the Office of the Comptroller of the Currency, said card issuers need the flexibility to "reprice" old balances when their risk changes.

"We have concerns that some provisions (of the proposed law) would deprive lenders of the option to protect themselves from the changing risks presented by unpaid balances," she said. The OCC favors enhanced notification of interest rates changes but opposes limitations on interest rate increases.

The American Bankers Association also raced to the defense of the credit card industry.

"We are concerned the proposed legislation would create a host of negative, unintended consequences, including more expensive credit for all consumers," said CEO Edward Yingling in a statement. "Many of the credit card practices Congress is attempting to curtail through legislation allow credit card issuers to provide worthy borrowers with low-interest rates, no annual fees and broad access to credit."

While speaking in support of the legislation, Sen. Ron Wyden, D-Ore., urged even more comprehensive reforms. He and presidential candidate Barack Obama, D-Ill., have proposed a new ratings system on credit card issuers to be maintained by the Federal Trade Commission.

"If all we do is ban these egregious practices what will happen is this industry, which has always been one step ahead of regulators, will just figure out how to create a bunch of other egregious practices," he said.