Banks Warn Credit Card Legislation May Hurt, Not Help Consumers

By Alexis Leondis

Aug. 21 (Bloomberg) -- Frank Chan said he had been a loyal Citibank cardholder for 20 years when he was told by a customer service agent that stopping a check payment would cost him $29.

He said he was shocked to see on his next credit-card statement that as a result his interest rate had more than doubled, from 13.9 to 28.9 percent, and applied to his current balance.

Citigroup Inc., the biggest U.S. credit-card lender, agreed to remove the additional interest charged, yet for Chan it was too late.

``I was so angered by their sneakiness that I paid off and terminated my Citicard account immediately,'' said Chan, 43, a religious studies professor from New City, New York. Citigroup declined to comment on the specifics of his case.

A bill pending in Congress seeks to protect credit-card users from sudden rate increases and fees. Industry groups say there will be unintended effects of the measure, especially for consumers who pay their bills in full and on time. Consumer advocates say it will give cardholders more control and prevent them from spiraling further into debt.

The bill, approved by a House of Representatives committee, requires 45 days' notice of interest rate increases, prohibits companies from changing the terms of the contract at any time for any reason, and makes issuers mail billing statements 25 days before the due date, instead of the current 14-day minimum.

``Less risky borrowers will have to absorb the costs posed by riskier borrowers if issuers can't price everyone based on the risk they pose,'' said Ken Clayton, senior vice president of card policy at the American Bankers Association based in Washington, D.C.

High-Risk

Card applicants who are perceived to be high-risk because of low credit scores may no longer qualify if the legislation passes, Clayton said.

With declining home equity limiting access to credit, more Americans are relying on plastic. Consumer credit-card debt is nearing the $1 trillion mark, which is double the amount held in 1996, said Representative Carolyn Maloney, a New York Democrat who is sponsoring the bill, in an e-mail.

``Now more than ever, we need to end unfair and deceptive credit-card lending practices that make it difficult for consumers to control their credit and manage their debt,'' said Maloney.

About 60 percent of cardholders don't pay off their balances each month, said Ben Woolsey, director of marketing and consumer research at CreditCards.com, an online resource for credit-card users.

The percentage of credit-card debts that were unpaid after at least 30 days rose 22 percent this June over a year earlier, averaging 4.03 percent, based on reports filed by American Express Co., Bank of America Corp., Capital One Financial Corp., JPMorgan Chase & Co., Citigroup and Discover Financial Services.

Interest Rates

The average interest rate charged on existing credit-card balances was 13.5 percent, according to the Federal Reserve's June G19 report, which tracks rates for credit-card accounts.

One of the most beneficial parts of the legislation requires issuers to apply payments proportionally, rather than just applying payments to the lowest rate so higher interest rates continue to accumulate a bigger balance, said Ruth Susswein, the deputy director of national priorities at Consumer Action, an advocacy group based in San Francisco.

``Instead of teasing people with low introductory rates, giving cards to anyone who breathes and then hitting them with fees and penalties on the back end, lenders can still price for risk, they just have to do it on the front end,'' Susswein said.

Losses

The decline in second-quarter earnings by card companies may adversely affect cardholders, said Bill Hardekopf, chief executive officer of LowCards.com, a Web site that compares the rates of almost 1,300 credit cards. Profits fell 34 percent for American Express and 17 percent for Capital One from the previous quarter, in part because of consumers defaulting on debt, according to Bloomberg data.

``One way issuers may compensate is by being very quick to the trigger to increase rates, so if your credit score takes any kind of dip, they may increase your interest rates,'' Hardekopf said. Credit scores may take a hit from late payments or using more than half of your available credit.

Hardekopf, based in Birmingham, Alabama, suggested signing up for online credit-card notices, so cardholders don't accidentally throw away a purposefully white unmarked envelope, which might contain important information about changes in rates or fees.

He also said consumers who pay their balances every month can take advantage of cards with a cash-back or rewards program. If they have available cash, cardholders with outstanding balances should debit their purchases because they will just make interest payments on the larger balance, Hardekopf said.

Debt Rising

Credit-card debt per U.S. household totaled $8,308 in 2007, up 7.2 percent from the previous year, according to the Nilson Report, an industry newsletter based in Carpinteria, California.

If cardholders are in danger of defaulting, they should call the card issuer and try to negotiate a lower interest rate or more amenable payment schedule, said Noreen Perrotta, money editor for Consumer Reports.

Credit counseling, to help with consolidating debt and mediating a payment plan with issuers, is also an option, said Perrotta, who is based in Yonkers, New York. She recommended the National Foundation for Credit Counseling, which represents nonprofit agencies.

Citigroup said it encourages customers to reach out whenever they have a concern or dispute about their account. The New York-based bank eliminated the so-called any time for any reason increases to rates and fees last spring.

``I've since decided to simply use cash and only use a credit card as a last resort,'' Chan said.

To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net.