Banks Eye Tighter Credit Card Terms

(WASHINGTON) — Banks expect to tighten terms on credit cards in response to a new law that aims to protect consumers from sudden rate hikes, the Federal Reserve said Monday.

A quarterly survey by the Fed found that many banks expect to increase rates, reduce credit limits and raise annual fees for both prime borrowers — those with sound credit histories —as well as more risky "non-prime" borrowers, who have tarnished credit. Banks also expected to raise minimum credit scores for non-prime borrowers, the Fed said. (See TIME's special "Planning For Retirement at Any Age.")

Banks already have been pushing through rate increases in anticipation of the new rules. Because of that, the House recently approved legislation to speed up the law's effective date and have the provisions take effect immediately, although prospects are dim for Senate passage.

Most of the new credit card provisions are slated to take effect on Feb. 22.

Many people and businesses are still having trouble obtaining loans, a force that is likely to restrain the economic recovery.

It's a delicate dance for policymakers in Washington. They want banks to boost lending, but no one wants a return to the lax standards that many blame for contributing to the worst financial crisis since the 1930s.

The Fed's survey also found that nearly 26 percent of banks said they tightened standards over the past three months on home mortgages for prime borrowers. That was up slightly from almost 22 percent in the survey released in August, but is significantly below the peak of about 75 percent that reported tightening standards for such loans in July 2008.

For the third straight quarter, banks reported that demand for such loans grew, the Fed said.

Just over 30 percent of banks reported tightening standards on nontraditional mortgages, such as adjustable-rate loans with multiple-payment options. That's down from nearly 46 percent in the previous survey.

Information about what impact the new credit card law will have on banks came from a special one-time question in the new survey.

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