Aug. 19 (Bloomberg) -- Americans with the best credit may be hurt the most as the first phase of a credit-card reform law takes effect tomorrow, said Schwark Satyavolu, founder of a card-comparison Web site.

Lenders are raising rates across the board, according to Satyavolu, president and co-founder of BillShrink.com, which compares terms offered to consumers for credit cards, mobile phones and gasoline. The company says the average lowest card rate is about 11.25 percent, up from 8.85 percent in January. The average for less credit-worthy customers rose to 15.75 percent in July, from 13.75 percent in January.

“Banks are setting the bar high enough so they’ll only go down from here,” Satyavolu said.

The law gives cardholders some of the tools Congress promised to exercise more control over their accounts. They’ll have 45 days to reject proposed rate increases and they’ll have the option of paying off their existing balances at the current rates over a period of at least five years. Companies will have to mail bills 21 days before the due date, up from 14 days.

Banks have already implemented parts of the credit-card law, Satyavolu said. Eleven major lenders have dropped “universal default,” the practice of raising interest rates based on a missed payment with another company. Fourteen have stopped double-cycle billing, where lenders calculate finance charges based on more than one billing cycle.

No major lender has started applying a customer’s payment to higher-interest balances first, Satyavolu said. That provision will cost issuers more and takes effect in February 2010.

Higher Rates

Rates are about 20 percent higher than in December, said Eleni Constantine, director of the financial security portfolio at the Pew Charitable Trusts. The lowest median advertised rates are 11.99 percent now, compared with 9.99 percent in December.

Banks have been raising rates on consumers at the same time that their own borrowing costs are decreasing, giving them bigger marginal lending rates and more profits, said Constantine, who helped shape the law as a staff member for U.S. Representative Carolyn Maloney, a New York Democrat.

Consumers who choose to reject a rate increase within 45 days will have two options at the bank’s discretion -- to pay off the balance in five years, or double the current minimum payment.

‘Balance of Power’

“It should shift the balance of power between consumers and banks,” Constantine said.

More changes come in February, when the bulk of the credit- card law takes effect. That’s when retroactive rate increases on existing balances will be fully banned and consumers will be protected from “hair-trigger” rate changes on minor infractions, such as sending a single payment a few days late, Constantine said.

The law is designed to help a person who carries a high balance, said Linda Sherry, a spokeswoman for San Francisco- based Consumer Action, which released an annual survey of the industry Aug. 12. Consumers canceling cards need to think about how having less credit available may affect their credit score. They’ll also need to take into account how many other cards they hold and how long they’ve had them, Sherry said.

One of the biggest changes in the market is the reduction in fixed-rate credit cards, and that’s likely to continue, Sherry said. Consumers may not have noticed the change, since the prime lending rate is at historically low levels. The prime rate was 3.25 percent yesterday and has been unchanged since December, according to Bloomberg data. When the Federal Reserve raises rates as the economy picks up, interest on variable-rate cards will follow.

Lower Limits

Credit will continue to be less available, borrowing limits will be lower and consumers will pay more, said Nessa Feddis, senior federal counsel at the American Bankers Association in Washington. There will be more annual fees, higher fees for balance transfers and cash advances, and pared-back rewards programs, she said.

Companies are lowering limits and closing accounts to reduce their long-term risks. “The industry is going to have to innovate and experiment,” she said.

Even with the recent increases, rates on credit cards remain low compared with the 1980s and 1990s, Feddis said.

While the market has already changed dramatically over the past year, companies are going to continue to search for ways to make up lost revenue, said Bill Hardekopf, chief executive officer of LowCards.com, a Web site that allows consumers to compare terms on over 1,000 cards.

“These are for-profit companies, not philanthropic companies,” Hardekopf said. “It’s still and will always be a competitive industry. There are still some good cards out there.”

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

Last Updated: August 19, 2009 11:31 EDT