Credit card companies are rushing to increase interest rates to historic highs of more than 30 percent, cut credit limits, and add new fees, even for customers who pay their bills on time.
Lenders are making the moves in advance of tougher federal regulations for credit cards scheduled to take effect on Feb. 22. The new rules will limit how companies can modify credit card agreements, specifically prohibiting them from retroactively raising interest rates and fees on existing balances.
US Representative Barney Frank, the Massachusetts Democrat who chairs the Financial Services Committee and is a leader in the effort to revamp credit card policies, said banks have "abused'' the nine-month period granted them to re-tool their practices.
"I didn't think they would be as blatant as they were about doing this,'' he said. "There's no justification for raising rates retroactively. This is really just a way for them to make more money.''
As a result of ever-escalating rates and fees, cardholders like Carole Hoppe Mezian of Norwood dread the arrival of their monthly statements. Hoppe Mezian carries a $10,000 balance on her Discover card and says she sometimes can't make payments on time. Since May, her interest rate has ballooned from 14.99 percent to 29.99 percent, and the minimum due on her September bill was $771, mostly in interest and penalties.
"I might have been better off going to the Mafia and getting a loan that way,'' she said.
Matthew Towson, a Discover spokesman, said the company is willing to work with Hoppe Mezian to help manage her debt.
A study by The Pew Charitable Trusts, an independent nonprofit, found the median interest rate advertised by most credit card companies in July 2009 was 13 to 23 percent higher than rates in December 2008.
To counteract the barrage of hikes, a bill now under consideration in Congress would move up to Dec. 1 enactment of the new rules. The House approved the accelerated plan Wednesday. But the bill's prospects in the Senate appear dim; many senators say a shortened deadline would cause banks to issue fewer cards, making it more difficult for consumers who most need credit to obtain it.
After years of complaints from consumer advocacy groups about credit companies' pricing practices, some rules have already been changed. For instance, portions of the new law enacted in August require banks to give customers 45-day notice of any changes in an agreement. Consumers can opt out of an impending increase, keeping their card at the lower interest rate, but only until the card expires. After that, they must apply for a new card. They can also avoid the interest hike by closing the account and arranging to pay off the balance at the lower interest rate.
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Ken Clayton, a senior vice president of the American Bankers Association, a trade group, said recent rate increases were not an effort to circumvent the new regulations, but the result of massive losses faced by the credit card industry because of the recession. More than 10 percent of all credit card customers have defaulted on payments this year, he said. "There's a shared risk here,'' he said. "Credit card companies are making loans to people every day and the rates people are charged are affected by whether people are paying them back.''
There are no limits on how much interest a credit card company can charge, and the new law, passed in May, will not change that. Some consumer groups called for a 36 percent cap on credit card rates, but Frank said legislators did not institute a limit because most credit card companies would immediately "go up to that rate.''
While credit cards are becoming more expensive, interest rates set by the Federal Reserve have been at record lows for a year, allowing banks and credit card issuers to borrow money more cheaply. The prime rate - the amount banks charge their best customers to borrow money - is 3.25 percent. Credit card companies charge far above that because borrowing on a card is considered riskier.
At Bank of America, one of the biggest credit card providers in the country, credit card revenue dropped slightly between 2007 and 2008, from $14 billion to $13.3 billion. The bank received more than $40 billion in federal bailout money.
Lauren Bowne, a staff attorney at Consumers Union, the nonprofit publisher of Consumer Reports, called interest rates of 30 percent and above "astronomical.'' In the past, lenders have charged up to 30 percent, but typically only to risky customers. But such rates are now being applied to many more consumers, including those with pristine credit.
In addition to upping interest rates, banks are using fees to generate revenue, Bowne said, noting that some consumers have even been assessed fees for not using their cards often enough.
Betty Reiss, a Bank of America Corp. spokeswoman, said it implemented a rate increase after the new legislation was passed, but agreed not to raise rates again unless a customer is late two or more times in a paying a bill.
The upward trend in rates and fees has led to calls for even more regulation from consumer groups like the Industrial Areas Foundation. Spokesman Arnie Graf said many major banks are recouping lost profits at consumers' expense. Many of the nation's biggest credit card issuers are banks that benefited from billions in taxpayer money to help them recover from their own bad investments, he said.
"These are essentially dead banks borrowing from the government at nearly zero percent and loaning it out at 29.99 percent,'' Graf said. "Hell, anyone can do that.''