Credit Card Rates Continue To Rise

Submitted by SadInAmerica on Tue, 02/12/2008 - 2:03pm.

The Federal Reserve's dramatic rate cuts were expected to make it cheaper for consumers to use credit cards. But credit card interest rates remain high and in many cases have even climbed.

 

Bruised by a rise in foreclosures, banks have been reluctant to lower rates for cardholders who have missed payments or had their credit scores slip, analysts and industry watchdogs said. Yet even some cardholders who pay on time have not benefited from the Federal Reserve's recent actions, as banks raise rates and fees to make up for losses in their mortgage departments, analysts said.

"Not everyone is going to get a rate decrease," said Edmund Mierzwinski, consumer program director for the U.S. Public Interest Research Group, a Washington-based consumer advocacy organization. "People presume that because the Fed lowers rates, the banks will."

The increases have perplexed customers such as Richard Davis, an insurance agent who lives in Fairfax County who said the annual percentage rate on his Chase Business Visa card went from 8 percent to 24 percent in December, three months after the Fed's first rate cut. "That just floored me," he said.

Card companies say they are exercising their right to protect themselves from risky borrowers and market conditions. But their actions have attracted the attention of Congress, which is considering several bills that would crack down on lending practices.

Consumer advocates and analysts worry that higher interest rates will make it more difficult for borrowers to pay down their debt, which could slow consumer spending and further weaken the economy. Last week, the Federal Reserve reported that borrowing slowed in December, with revolving debt totaling $944 billion, most of it on credit cards. That was a seasonally adjusted annualized increase of 2.7 percent, down significantly from a growth rate of 13.7 percent in November.

The subprime mortgage meltdown has spilled into the credit card industry in other ways. Banks have reported steep write-offs related to the mortgage mess, and their stock prices have plummeted. "Credit cards historically have been a very profitable segment for the banking industry, so what they're doing is trying to squeeze customers as much as they can, particularly for accounts they don't see as profitable or as high risk," said Curtis Arnold, founder of CardRatings.com, an independent consumer resource on credit cards.

Bank of America, for instance, notified some customers recently that their rates would increase as a result of a periodic review of their credit risk. Chase late last year increased the rate paid by new customers of its Freedom card. Bank of America and Chase are also among some banks that have increased ATM fees for other banks' customers to as much as $3 per visit. Capital One has raised its cash-advance fee for new customers from 19 percent to 23 percent.

Davis, the insurance agent, said he called Chase when his rate skyrocketed on his balance of $4,500, which he said he was paying more than the minimum on time every month. Davis was told that he should have received a letter giving him the option to close the account if he did not want the new rate, he said. He did not recall seeing that letter. He wrote to the bank requesting that his previous rate be restored. Last month, he said, he received a letter from Chase notifying him that the account was closed. "It was either that or pay the higher APR," he said. "You gotta do what you gotta do."

Jessica Hougentogler, a spokeswoman for Chase card services, said she could not comment on specific cases but that "there are a few reasons why a customer may see an increase in their rate including, a violation of the terms of their . . . agreement, making a late payment, exceeding their credit limit, paying with insufficient funds."

Davis said he did not commit any such violations.

Congress has been examining other industry practices such as increasing cardholders' rates for making late payments to other creditors or decreasing their limits, which hurts their credit scores by increasing the percentage of the available credit they have used.

On Thursday, Rep. Carolyn B. Maloney (D-N.Y.), chairman of the House financial institutions and consumer credit subcommittee, introduced the Credit Cardholders' Bill of Rights Act of 2008, which would, among other things, restrict fees and rate changes that companies could impose.

Sen. Carl M. Levin (D-Mich.), chairman of the Permanent Subcommittee on Investigations, has proposed a similar bill. He said in an interview that Congress will keep an eye on how card issuers react to the changes in the federal funds rate, which the Fed controls. "The credit cards raise the rates when they go up. They should go down when interest rates go down," he said.

Some card issuers have already responded to congressional pressure. Citigroup, for instance, said last year that it would end a practice known as universal default in which it penalized customers for making late payments to other creditors. In March, Chase will no longer increase rates when credit scores drop.

Most major banks base the annual percentage rates on variable rate cards, which make up the majority of credit cards, on the prime rate, which is pegged to the federal funds rate. But most banks have latitude when it comes to how much and how soon they drop rates after a Federal Reserve action -- and for whom.

"You can't look at that rate that the Fed publishes and say that's what I'm getting," said Desiree Fish, a spokeswoman for American Express.

Betty Reiss, a spokeswoman for Bank of America, said it has been common practice for some time for the bank to periodically review each account and "reprice an individual based on that risk assessment."

Customers can reject new rates and close their accounts, she said. She would not disclose how many people have been repriced recently but said that last year, fewer than 3 percent of customers received such rate increases, while 26 percent ended the year with lower rates.

Chase, meanwhile, increased its rate for new Freedom card customers "due to a variety of reasons, from providing a richer rewards program to more effectively managing risk," said spokesman Paul Hartwick.

Joanne Robertson-Gordon, a Takoma Park resident, has a different kind of Chase Visa credit card but in November, she said, she received a letter saying her 8.9 percent rate would rise to 21.24 percent. In December, she noticed that her HSBC Mastercard had gone from 13.99 percent to 15.99 percent. She owes both creditors about $3,100 combined. "It was just painful," she said.

Since her husband died in December 2005, she has been struggling financially. She said she used to pay more than the monthly minimum. Now, she said, she typically pays only the minimum but does so on time, except for one month when she had trouble paying online. "I'm so afraid of them," she said. "Every time you call, they raise something."

Chase would not comment on Robertson-Gordon's case.

Cindy D. Savio, a spokeswoman for HSBC-North America, said privacy laws forbid her from discussing a specific customer. "What I can tell you is that most HSBC credit card accounts tied to prime will receive a decrease," she added.

Even those cardholders who get some relief will not get much, industry experts said. Since September, the Federal Reserve has cut the federal funds rate by 2.25 points, to 3 percent, while the average variable rate on credit cards has dropped less than a point, from 13.97 percent to 13.05 percent, according to BankRate.com.

"Even if your credit card company would subtract 1.25 percent off your monthly interest rate, if you're revolving a balance on a high-interest credit card, it's akin to putting a Band-Aid to a sucking chest wound," said Joe Ridout, a spokesman for Consumer Action.

 

Washington Post - February 11, 2008 - posted at www.roguegovernment.com

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Submitted by SadInAmerica on Tue, 02/12/2008 - 2:03pm.