May 22 (Bloomberg) -- President Barack Obama signed into law a credit-card consumers’ “Bill of Rights” that limits fees and curbs contract changes, saying it will give Americans “the strong and reliable protections they deserve.”

“We’re putting in place some common sense reforms, designed to protect consumers,” Obama said at a White House Rose Garden ceremony. “We’re not going to give people a free pass, we expect consumers to live within their means and pay what they owe, but we also expect financial institutions to act with the same sense of responsibility.”

The legislation would make card companies apply payments to balances with the highest interest rates first. Increasing a consumer’s rate on existing balances based on late payments to another lender, a practice known as “universal default” would be prohibited.

The administration considers the legislation part of its efforts to restore the U.S. economy by creating a “fair, transparent and simple consumer credit market,” Treasury Secretary Timothy Geithner said May 19.

The American Bankers Association, representing companies such as Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc., opposed the bill, saying banks will be prevented from pricing for risk and credit may become less available.

“This is a real wake-up call to the credit card industry,” Gene Truono, a former bank compliance officer, said in a telephone interview today. “Some of the acts and practices over the years have not been favorable to consumers.”

‘Profitability’

Card issuers are likely to raise interest rates “so they can continue to maintain a level of profitability,” he said. In the long run, “you’ll see much more competitive interest rates” for people with the best credit ratings, said Truono, now a managing director of BDO Consulting in New York.

Credit-card companies are reeling from record default rates. Charge-offs, which are loans the banks don’t expect to be repaid, were 9.01 percent on average in April compared with 5.24 percent a year earlier, a 72 percent jump, according to data compiled by Bloomberg.

Available consumer credit contracted by a record $11.1 billion in March, according to a May 7 Federal Reserve report. The drop was equivalent to a 5.2 percent annual rate, the biggest since 1990.

Credit-card industry analysts have said companies’ average losses on bad loans may exceed 10 percent this year, setting a record.

Tightening

New York Democratic U.S. Representative Carolyn Maloney said lawmakers were inundated by complaints from credit-card customers.

“It got to the point where I literally couldn’t walk down the street to go to the supermarket, or ride the subway, or even go to the floor of Congress where I was not told of rates being hikes on balances, even when consumers were playing by the rules,” Maloney said May 20. “It absolutely inflamed the public.”

Americans pay around $15 billion in penalty fees each year, the White House said. Nearly 80 percent of American families have a credit card, and 44 percent of families carry a balance.

Obama said the legislation is intended to reverse instances in which companies have taken advantage of credit-card customers.

‘Drafted to Confuse’

“Contracts are drafted not to inform but to confuse,” Obama said. “Mysterious fees appear on statements. Payment deadlines shift. Terms change. Interest rates rise. And suddenly a credit card becomes less of a lifeline and more of an anchor,” he said.

The measure requires 45 days’ notice before lenders can increase a card’s interest rate. It would prohibit retroactive rate increases on existing balances unless a consumer was 60 days late with a payment. Companies would have to restore the original, lower rate if a cardholder stayed current six months after a late payment. Banks will have to comply with the new law in nine months.

The law also aims to tighten restrictions on lending to students and how gift cards are redeemed. It bans fees for paying by phone or over the Internet, except for live services to make expedited payments. It also aims to simplify the way terms are disclosed to consumers.

To contact the reporter on this story: Jeff Plungis in Washington at jplungis@bloomberg.net.

Last Updated: May 22, 2009 17:37 EDT