DEL.ICIO.USCredit card companies quick to raise rates, fees
Paying late bills barely better than never
The Atlanta Journal-Constitution
Sunday, November 30, 2008
Greg Fischer was already fed up with Bank of America for doubling his credit card’s interest rate to 28.99 percent — the price for being a couple of weeks late with a payment in April.
What sent him over the top, he said, was the bank’s decision to rule his September payment late, too. He paid on the due date on the bank’s Web site. But he paid at
RICH ADDICKS / raddicks@ajc.com
Jim Gosnell says he missed one credit card payment and his interest rate rose to 36.33 percent. He uses the card for his construction business and has a $31,000 balance.
LOUIE FAVORITE / lfavorite@ajc.com
When Monica Johnson’s credit score worsened, her credit card companies decreased her limits and raised her interest rates to the point she can’t make the minimum payments.
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4:10 p.m. — past a 3:30 cutoff that Fischer said he wasn’t aware of.
That payment cost him not just a late fee. It also meant he would have to live even longer with the “default” interest rate, which the bank applied retroactively to the balance on his account. Bank of America told him it would not consider lowering the rate until he paid on time for six months straight.
“Ten years of a great track record as a customer, conversations and detailed notes with several customer service folks got me absolutely nowhere,” said Fischer, who lives in Macon. “A 40-minute ‘late’ payment is going to cost me hundreds of dollars in interest payments if I cannot come up with the money to pay off this card in full.”
Plenty of Americans are frustrated with their credit card companies these days. Now the Federal Reserve Board is considering rule changes to address some of the practices that have vexed cardholders and consumer advocates.
At issue is that most credit card companies write their contracts in such a way that they can change the terms of the account at any time for virtually any reason.
Banks can hike interest rates on accounts and apply the new rates not just on future charges but also on the charges already on the account — even if the cardholder has paid on time every month. A missed payment on any other loan, a drop in a credit score, the lowering of a credit limit by another lender — or anything else that makes a customer seem riskier — can trigger a higher rate.
The “repricing” of an account can double what a consumer owes in interest charges.
“People don’t understand that the credit card company can do whatever it wants,” said Ed Mierzwinski of U.S. PIRG, a Washington consumer organization.
But banks say that in today’s climate, it makes sense to change the terms of some consumers’ accounts. Because charge accounts are open-ended and not secured by a house or a car, they are riskier than other loans.
“Banks are seeing increased delinquency and increased risk in the marketplace, and they have had to take prudent action to limit that risk,” said Ken Clayton, a vice president at the American Bankers Association. “That’s what people expect lenders to do.”
Betty Riess, a Bank of America spokeswoman, declined to address Fischer’s situation. But she said in an e-mail that the company is “taking a more aggressive look at accounts to control risk in the current environment.” The bank studies a number of factors and may consider a customer risky if there are late payments, if the customer is taking out numerous new loans or using most of his available credit.
“Our practices are fair, and balance the safety and soundness of our business with serving our customers’ needs,” Riess said.
Ed DePrimo has learned how much the terms on an account can change. The owner of a Roswell business said he has used an Advanta credit card for about two years to order inventory.
DePrimo said he always pays the minimum — usually more — and always pays on time. In spite of his payment record, he said, Advanta, which specializes in cards for small-business owners, has steadily increased the APR. It’s now at 37 percent.
“I don’t have anything in my life that’s higher than 12 [percent] or 14 percent,” DePrimo said. “This is blowing my mind. It’s not even close to reality. Our credit [score] has always been north of 720 or 740, and we’re relatively high income.”
DePrimo said the high APR costs him an additional $500 a month in interest costs alone.
DePrimo said it’s possible a lender could view his business as more risky in today’s economy because it carries debt. But he said Advanta hasn’t given him a straight answer about what triggered the hike and has refused to negotiate.
“For a small-business person, it’s deadly,” he said.
Advanta would not comment on an individual account. But company spokesman David Goodman said in an e-mail: “We periodically evaluate each of our customers’ accounts to assess their ongoing creditworthiness and overall lending risk.”
A survey this year by the National Small Business Association found that nearly half of the nation’s small-business owners use credit cards to run their operations — and the majority of those carry a balance from one month to the next.
The association has been lobbying for the new rules under consideration by the Federal Reserve Board.
“We’re not asking that the credit card companies can’t price for risk or change interest rates — but we think that existing balance interest rates shouldn’t be raised,” said Kyle Kempf, the association’s senior director of government affairs.
Suzanne Boas, president of Consumer Credit Counseling Service of Greater Atlanta, said credit card companies are much quicker these days to lower credit lines and raise interest rates — even if the payment missed was on another account.
“They see a sign of trouble, and they are trying to protect their investment,” she said. “But from the consumer’s perspective, it limits their ability to work out of their situation.”
Boas said her agency has seen an uptick in requests for budgeting help from consumers overwhelmed by debt. In the past, many of those consumers could refinance their mortgages and wipe out the credit card bills. In the age of the mortgage meltdown, that’s no longer an option for many.
The typical consumer who seeks counseling from CCCS of Greater Atlanta has an average gross household income of $40,650 and average unsecured debts — usually credit cards — of $27,000.
The fine print of the disclosures sent to every credit card customer makes it clear, the banks say, that the loans are constantly under review.
“It’s sort of like a new loan every month,” said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, a trade organization.
Consumers need to understand that the terms can change when they are deciding how to use the account, the banks argue.
“Whether it’s a car loan or a mortgage or a credit card, you need to understand the terms,” Talbott said. “A lot of what we’re hearing is shock and confusion about the terms of their credit card agreement. Granted, it’s long, and the font can be small. But it’s very important for them to understand the contract they are entering into.”
Credit card companies haven’t always done business this way. Upping a consumer’s APR because he paid late on another account or his credit score worsened is a practice most credit card companies have adopted only in recent years. The banks say these practices allow them to price accounts according to the customer’s risk. While some customers get hurt, they say others are helped by obtaining low rates.
That change came along with others that consumer advocates have objected to, including:
• Charging late fees and increasing interest rates when payments were made just a day late — or even after a cut-off time on the due date.
• Applying payments in such a way that low-interest balances are paid off first, while higher-interest balances often associated with cash advances are paid off last so they continue to accrue higher interest charges.
• Calculating interest over two billing cycles in a way that usually works against a consumer.
• Requiring customers to settle disputes through arbitration, instead of allowing them to file lawsuits.
• Charging over-limit fees when the bank has authorized the charge that put the consumer over the limit.
Until now, federal regulators have done little to object to such practices as long as the banks disclosed the details to their customers.
This year, however, the Federal Reserve Board indicated a willingness to step in. Its proposed new rules includes a ban on increasing the APR on an account’s existing balance unless the customer has been more than 30 days late with a payment on the account.
Final action on the proposed rules is expected by the end of the year.
‘I have been financially raped’
Jim Gosnell was already having trouble keeping his contracting business going in today’s real estate slump.
Then, Advanta bank compounded his financial stress. Gosnell used an Advanta credit card for about five years to help run his business. The introductory rate: 3.33 percent.
The APR crept up over the years: first to 11.12 percent and then up a point or two for the next few years. But Gosnell was hit hard this summer when he missed a payment. The new rate, which applies to the entire $31,000 balance on the card: 36.33 percent.
“Advanta bank told me they are the ones that set the rates and not me — and they have the right to leave it there,” said Gosnell, who has spent 34 years in the construction business. “I feel like I have been financially raped. It’s not right.”
Gosnell said he always paid his account on time until June, when the slump in his business put him behind. But the dramatic jump in the rate means that he now can’t even make the minimum payment. And he said his attempts to work with the bank have been an exercise in frustration.
“It’s a joke if you call and try to talk to anybody,” he said. “I feel like they think I’m just a sorry, no-good bum, and I’m not.”
Advanta declined to comment on an individual consumer’s account.
Gosnell, who is married and is raising his grandchildren, ages 12 and 17, said he loves working construction — that’s what he’s done all his life — and had a thriving business focused on insurance-related home repairs. He’s watched some of his competitors go belly up. If Advanta keeps the rate on his balance too high, Gosnell said, there’s no way he can repay a debt that he never imagined would end up with such a high rate of interest.
And he thinks the regulators need to put a stop to what the credit card companies are up to.
“You’re bailing the banks out — why won’t they drop the APRs?” he said. “It’s greed.”
‘It’s starting to backfire on me’
Not long ago, Monica Johnson had good credit. And she decided to use it to build wealth. She bought two houses for rental properties. She co-signed a mortgage for her mother’s house and she has a house of her own.
At some point, after making the real estate investments, her credit score worsened, apparently because she had taken on so much debt, she said. When her score dipped, her credit card companies started turning on her: first by decreasing her credit limits and more recently by upping the interest rates — including the rate charged for the balances on her accounts.
“To me, it’s like changing the rules in the middle of the ball game — is that fair?” said Johnson, 43, who has worked for AT&T and its predecessor BellSouth for more than 20 years.
Johnson said she didn’t think credit card companies would increase interest rates on existing balances — especially if you paid on time. But, Johnson said, the changes upped her finance charges to the point that she can no longer cover the minimum payments.
She said she has credit card debts totaling about $55,000. The balances got high when she charged some bills to send her son to college and paid the mortgage on one of her rental properties for a period when she was without tenants.
Johnson, who lives in Stone Mountain, said she has tried to refinance her mortgages and to consolidate the debt with a new loan — all to no avail. Her credit and debt scenario, combined with today’s credit crunch, mean that lenders now view her as too risky.
“They preach to you about keeping good credit and with good credit you can get anything — you can get property, and I did that,” she said. “Now it seems like it’s starting to backfire on me.”
‘Ruin a 10-year relationship’
Greg Fischer was getting ready to submit his online credit card payment to Bank of America in September when a box popped up. The payment would be posted the next day, he was being told by the computer, because it was after 3:30 p.m.
“That just floored me!” Fischer said.
He was being extra careful this fall to make his payments on or before the due date because Bank of America had upped the account’s interest rate after he made a late payment in April. The new 28.99 percent interest rate applied to his entire outstanding balance of $7,000 and would stay that way, the bank advised, until he paid on time for six months.
Fischer said he called customer service and was told it was OK — the payment would not be considered late.
When he checked the account, however, the payment did post a day late. He got hit with a $35 late fee, but he was most concerned about the APR. He called customer service again, he said, and was told they would remove the fee and consider the payment on time.
He called back four days later and got another story: The late fee was back on the account, and it would be another six months before he could get his APR lowered.
Bank of America declined to comment on an individual consumer’s account.
Fischer, a married father of two who works for an asphalt contractor in Macon, said he has been a solid Bank of America customer for 10 years. He said he and his wife plan to sell one of the family’s cars to pay off the account’s $7,000 balance. At this point, Fischer said, he will consider taking less money than he would like for the car he wants to sell, simply to get Bank of America out of his life.
“It’s a shame they’re going to ruin a 10-year relationship over 40 minutes,” Fischer said.
PROTECTION
The Federal Reserve Board in May proposed rules to protect consumers from “unfair and deceptive practices” by the credit card industry. The proposal drew 62,000 public comments — more than any other rule in the Fed’s history.
The Fed is expected to make a final decision by the end of the year. Changes seem likely, based in part on comments made by some board members. Federal Reserve Board Chairman Ben Bernanke has said, “Consumers relying on credit cards should be better able to predict how their decisions will affect their costs.”
Among the proposed rules:
• Interest rates: Today, banks can bump up interest rates on outstanding credit card balances, even if the customer has a perfect payment record on the account. Under the change, banks could only ratchet up the rate on a balance if a minimum payment is at least 30 days late, a promotional rate is expiring or the customer has a variable rate.
• Time to make payments: Banks must give consumers a reasonable time to make payments. The new rule encourages banks to send statements at least 21 days before the due date.
• Allocating payments: Banks charge different interest rates for cash advances, purchases and balance transfers. The new rule would stop the widespread practice of applying payments to low or no-interest balances first, instead of applying payments to the balances that accrue higher-rate interest charges.
• Over-limit fees: Rule would prohibit banks from charging over-limit fees if the limit is exceeded because of a hold placed on the account. Hotels and other merchants can use holds to reserve credit on an account when the total charge isn’t known in advance.
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