Forget the credit-card designer colors, the low-interest “teaser rates,” and the reward programs. It’s time to look at the fine print of credit cards, and, to some, the higher costs outlined there are “ugly.”
Tales of soaring interest rates and fees for credit-card holders have captured Washington's attention, which will focus this week on possible remedies. Congress, which has not addressed substantive credit-card reform in decades, is close to approving a "credit-card holders bill of rights," and President Obama is set to meet with banks and credit-card issuers on Thursday about consumer complaints, especially sky-high interest rates, according to Lawrence Summers, the president's chief economic adviser.
“Once the ... chief economic adviser says the president is focusing on credit cards right now, that is issue No. 1, no question,” says Joel Naroff of Naroff Economic Advisors in Holland, Pa. “In terms of credit cards, we are in the process of going from irresponsible to responsible, and that process [of adjustment] is ugly – and that’s what we are involved with right now.”
Banks, which are seeing defaults and delinquencies rise on credit-card debt, are expected to tell Mr. Obama that they are taking steps to minimize their risk by raising rates and limiting their costs. Moreover, they say, it costs more for them to borrow and then relend to consumers because the securitization market for credit cards is still frozen.
For some, rates above 25 percent
Among the rate hikes or fee increases consumers are seeing are the following:
•Capital One increased rates for new customers on 15 cards. The Platinum Prestige card went from 7.15 annual percentage rate (APR) to 11.9 APR. The No Hassle Points card jumped from 8.15 percent to 13.90 percent.
•Citi changed its ThankYou reward structure by basically doubling the points needed for a $400 flight.
•Bank of America and Citi began charging a 3 percent fee, in US dollars, for all transactions made outside the US.
But borrowers who are tardy or behind on their payments see much uglier rates and fees. The companies with the highest interest rates for that subset of consumers, according to LowCards.com, are HSBC at 31.99 percent; Chase, Citi, and Discovery at 29.99 percent; and American Express and Bank of America at 27.24 percent.
Some consumer groups are outraged about the run-up in interest rates and other changes banks are making, such as shorter grace periods between the day a statement is mailed out and the day the payment is due.
“It’s almost impossible to pay a bill on time when they change the due date, the mailing date, and the definition of late from 30 days to 1 minute,” says Ed Mierzwinski, consumer program director at the US Public Interest Research Group in Washington.
One mistake equals a fee and a rate hike
Even sophisticated borrowers can get nailed if a payment is late. Bill Hardekopf, CEO of LowCards.com, recalls being two days late with a payment, after a credit-card bill got stuck in a pile of mail that collected while he and his wife were on vacation.
“The next month there was a finance charge, a late fee, and the APR went up 4 percentage points for messing up once,” he says.
Credit-card companies are likely to hear about these complaints when they meet with Obama. The president has some leverage.
“The biggest banks are also recipients of taxpayers' and other government monies to shore them up,” Mierzwinski says. “We anticipate some announcement.”
Some consumer groups do not oppose moves by banks to make credit less available for some people. “It’s a more reasonable way to deal with risk than tripling [those individuals'] interest rates,” argues Mierzwinski. “The lowering of credit limits is defensible as long as it is done fairly, which means not lowering to just below your balance or just above it.”
Banks see delinquencies rise
Banks are likely to show the administration their rising credit-card losses. As of the end of 2008, the delinquency rate – a measure of cardholders who are 30 to 90 days late on their minimum payments – was 5.56 percent, the highest level since record-keeping began in 1991, according to the Federal Reserve. Two years before that, losses were at 3.92 percent.
“The higher the unemployment rate, the more people are hurting [and] the more delinquent they are on their loans – and credit cards are a big part of them,” says Hardekopf.
Credit-card companies, however, are also closing accounts and cutting credit limits. Cardholders who pay only the minimum on their cards are getting their rates hiked so fast, says Hardekopf, “it’s almost driving them to close their accounts.”
In Dallas, Jerry Curtis of Burt and Associates, a collection business, recently helped a woman locked in a credit-card trap. The woman and her husband owed $1,400 on a Chase credit card, Mr. Curtis says. Both individuals became ill and could not keep up with their payments. Every month they would pay $33, while Chase hit them with a $39 late fee.
Finally, Curtis found a Chase supervisor who agreed to categorize the cardholders as “hardship” cases. She removed the late fees and froze the account for six months so they could pay it down. The card-holder "was at 24 percent interest, and we wanted to get it down to 8 percent,” says Curtis, who took the case on as community service.
The reviled 'universal default' rule
If Curtis’s clients had had more than one credit card, they might have discovered an issue that irks consumers the most: the “universal default” rule, in which a late payment on one card results in higher interest rates on other cards.
Some of these credit-card company practices, such as the universal default issue, will be banned under new Federal Reserve rules that go into effect in a year.
“The Fed’s new rules eliminate most of the areas of concern” among lawmakers, says Mr. Garuccio of the ABA.
Nevertheless, Congress is racing ahead with its own legislation. A House bill includes a Credit Card Holders’ Bill of Rights that would outlaw arbitrary increases in interest rates on existing card balances. In addition, it would eliminate “double cycle” billing by disallowing credit-card companies from charging interest on debt that consumers have already paid on time.
The legislation also tackles “subprime” credit cards, in which yearly fixed fees exceed 25 percent of the credit limit, by preventing those fees from being charged to the card itself. A House version of the bill will have to be reconciled with a Senate version, shepherded along by Sen. Christopher Dodd (D) of Connecticut. Obama indicated during the election campaign that he favors reform legislation.