April 30 (Bloomberg) -- The U.S. House of Representatives passed a so-called credit-card bill of rights after adding a provision requiring banks to apply consumers’ payments to balances with the highest interest rates first.

The legislation, which also imposes limits on card interest rates and fees, passed today by a vote of 357-70. President Barack Obama supports the measure, and it may be taken up by the Senate next week.

“Very soon this will be the law of the land, and consumers will benefit,” House Speaker Nancy Pelosi said.

Uncollectible credit-card debt rose to 8.82 percent in February, the most in the 20 years that Moody’s Investors Service Inc. has kept records. Lawmakers said they’re under increasing pressure from constituents to respond to rising interest rates and abrupt changes to consumers’ accounts.

The House bill imposes broader restrictions than those enacted by the Federal Reserve in December, which are scheduled to take effect in July 2010. It would accelerate some changes that card companies must make to comply.

The House action today will give the legislation momentum heading into the Senate, said Pelosi, a California Democrat. With a Democratic president who will sign final legislation, there is little doubt it will get support needed in both chambers, she said.

‘Millions of People’

“Millions of people across the country have been appalled by what’s going on with their credit cards,” said Representative Daniel Maffei, a New York Democrat. “How can consumers take advantage of competition if they can’t even understand their agreements?”

Spencer Bachus, the senior Republican on the House Financial Services Committee, said that too many restrictions will lead lenders, such as Bank of America Corp. and Citigroup Inc., to pull back on credit in the midst of a severe economic decline.

“Credit cards play a crucial role in the life of ordinary Americans,” said Bachus, of Alabama. “Any legislation affecting credit-card practices is going to have a profound effect. There are a great number of people whose rates will go up.”

Representative Carolyn Maloney, the legislation’s sponsor, responded that card companies are already cutting lines of credit, increasing interest charges even on existing balances, and the legislation hasn’t gone into effect.

“It’s happening now,” said Maloney, a New York Democrat. “Issuers can raise rates at any time for any reason.”

The Proposed System

The proposed system for allocating consumer payments is a priority of the White House, said Representative Luis Gutierrez, an Illinois Democrat. If it becomes law, the measure would reverse banks’ typical practice of applying payments to balances with low, teaser rates first and leaving other balances with higher rates in place, Gutierrez said.

Treasury Secretary Timothy Geithner spelled out four major principles for credit-card reform in a statement yesterday, including a ban on “unfair rate increases” and “abusive fees and penalties.” All card forms and statements need plain- language terms that are accessible for comparison shopping, the Treasury said.

Rate Notices

The legislation would make credit-card companies give 45 days’ notice before increasing rates. That provision would take effect 90 days after the measure is signed into law. Other changes would take effect a year after enactment, or July 1, 2010, whichever comes first.

The legislation would also require statements to be mailed at least 21 days before the payment due date, up from 14 days. It would ban unilateral changes to credit-card agreements and would permit retroactive interest-rate increases only when certain conditions are met.

The administration also backed an amendment, agreed to on a voice vote, requiring clearer disclosure in agreements. Lawmakers also agreed to a requirement that the Federal Reserve report every two years on the credit-card market and lenders’ compliance with consumer-protection laws.

The House voted to compel banks to keep low-interest “teaser” offers in place for at least six months before rates increase.

As the legislation continues on to the Senate, lawmakers need to properly balance consumer protection with the ability of lenders to make credit available at a reasonable cost, American Bankers Association President and Chief Executive Officer Edward Yingling said in a statement.

“It is vitally important to maintain access to credit at this difficult economic time,” Yingling said. “This is especially true for credit cards, which serve as a driver of economic activity and are relied on by consumers and small businesses as way to bridge short-term financial gaps.”

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

Last Updated: April 30, 2009 17:55 EDT