Banks abusing credit card fees

Just this month, however, House Financial Services Committee chairman Barney Frank accused banks of abusing the “grace period” they were given before all the law’s provisions take effect. Unfortunately for consumers, he’s right.

For example, Wells Fargo announced this month it was raising rates on existing accounts by up to 3 percent. Other card issuers, including Bank of America and JPMorgan Chase, also have been accused of raising rates on balances prior to the law’s effective date.

Additionally, in June, Bank of America and Chase switched many cardholders from fixed- to variable-rate cards. Variable-rate cardholders are not protected from unexpected rate changes under the new law, because rate changes are permitted as the prime rate moves up and down.

Those most likely to be harmed by higher borrowing costs are consumers who are relying on their credit cards to carry them through the economic downturn. According to Demos, a nonpartisan research and advocacy organization, most low- and middle-income households with high debt-stress levels — the ratio of a family’s credit card debt to their annual income — use their credit cards to pay for unavoidable expenses, such as medical expenses or to cover household essentials after a job loss, not for discretionary items.

Higher rates lead to longer payoff periods and thousands of extra dollars in interest payments. Let’s take the case of the average low- and middle-income consumers with $9,827 in credit card debt. If they continue to make a 2 percent monthly payment on that amount but at 13 percent interest plus prime, rather than our previous example of 10 percent interest, they must pay at least $19,897 in interest payments over the more than 45 years it will take to clear the balance. And because the prime rate is at historically low levels, this example likely presents a best-case scenario.

Many cardholders have responded to the downturn and the higher borrowing costs by reducing their debt. In July, revolving credit, which is largely credit-card borrowing, declined.

But reducing debt during these tough times is not an option for many.

Moreover, changes in the availability of credit are also making it more difficult for cardholders to protect themselves from the banks’ actions. In the past, cardholders could demand better terms by threatening to take their business elsewhere. Today, this option is limited, because many banks have tightened credit-card approval standards.

Banks may be putting themselves at risk by their actions as well. If consumers are subjected to usurious rates as the prime rate rises, more will inevitably default on their debt. Banks will find it difficult to make up for these losses by further raising rates on consumers who are already stretched to their limits.

Bank of America vowed this month to stop raising interest rates before the February limits take effect. But such a promise offers too little, too late for many consumers who have already been harmed.

Jamie Lau is a research fellow with the Community Enterprise Clinic at Duke University’s Law School.