Think All Credit Cards Are The Same?

You may be right!

Not long ago we were being bombarded with advertisements – a non-stop barrage of enticing products to bring home for the holidays. We were encouraged to spend, spend, spend. And we did. Now that the joy of the holiday season has ended, we are left to deal with the credit card debt.

What we didn’t know was that while this was going on, Congress was readying itself to attack the unfair practices of credit card companies. Senators have been receiving increased numbers of complaints from consumers about the credit card companies’ practice of raising customers’ interest rates after their credit scores decrease. Sometimes these rates are increased regardless of whether the customer is a model customer for on-time payment and staying under the credit limit.

Americans are bogged down in credit card debt, totaling $900 billion, or $2,200 per household. As debt mounts, the credit card companies do everything in their power to put the squeeze on consumers. These consumers are beginning to sound off. As the complaints roll in, the practices of the lucrative credit card industry are gaining increased scrutiny of, not only Congress, but also of the Federal Reserve, who will likely order credit card companies to give customers 45 days to close accounts before any increase in interest rate can occur in the near future. The Reserve will likely also demand clearer disclosure of fees – something long overdue in the credit industry.

Sen. Carl Levin, D-Mich., chairman of Senate Homeland Security and Government Affairs Subcommittee, is going to introduce legislation calling for voluntary changes within the industry. It’s a start. Douglas Muir, CEO and Founder of Credit Justice Services and consumer advocate, met with Senator Levin’s staff in December 2007 to advise them on the credit card and credit bureaus debacle. Mr. Muir states, “The inaccuracies of the 3 credit bureaus are driving the credit card interest rates through the roof”. Senator Leven also told reporters “working people are being squeezed.” In the same press conference he went on to say “these abuses need to be remedied… We have some real momentum for reform.” Good for Senator Levin. He and his staff are spearheading this movement for change, interviewing consumers, credit card companies, and industry experts (including a three and a half hour interview in Washington DC with Douglas Muir, CEO and Founder of Credit Justice Services, on December 20th) in an effort to gather enough information to bring about these reforms.

When Senator Levin’s U.S. Senate Permanent Subcommittee on Investigations Hearing: Credit Card Practices: Unfair Rate Increases met, they examined some of the cases from the citizen complaints that they were receiving. In their report are the cases of at least four consumers who have been treated unfairly by the powerful credit card companies. I will summarize below:

Janet Hand, of Freeland, Michigan, is a registered nurse who has had a Discover card for years. In 2006, her interest rate was raised from 18% to 24%. The action was taken because her FICO score had dropped. To add insult to injury, Discover also applied the rate increase to her existing credit card debt. The higher rate now makes it difficult for Janet to pay down this debt. As this [color=#][colo[/color]r=blue]chart[/color] indicates, Mrs. Hand made monthly payments of $200 to reduce her debt. As a result, of the $2,400 that she paid last year, $1,900 went to finance charges, and a mere $350 of her debt was paid off.

Millard Glasshof, of Milwaukee, Wisconsin, is a senior citizen living on a fixed income. For years he has faithfully paid on the balance for his closed Chase card, contributing $119 each time to reduce his debt. Out of nowhere in December, Chase raised his interest rate from 15% to 17% – and then from 17% to 27% in February. The reason for the rate change was that Chase did a review of closed accounts that were being paid off and found that Mr. Glasshof’s FICO score had dropped. Making matters worse, the 27% rate was also applied to the $4,800 balance left on the card.

On February 7, Robert Berner wrote [color=#]this article[/color] for Business Week about Bank of America. In it, he cited this case:
Michael Jordan, 25, a software developer who lives in Higganum, Connecticut, says he received a letter from Bank of America in late January advising him that his card rate would rise from 9.99% to 24.99%. Jordan, who earns $80,000 per year, says he was “shocked” because his payments had been on time and his credit score hadn’t changed in the last year. In fact, Jordan says, he has only $4,500 in overall outstanding credit card debt on two cards and that, on the Bank of America card in question, he had paid down his balance to $3,000 from $3,700 last August. “His rate increase seems unjustified based on his credit profile,” says David Robertson, publisher of The Nilson Report, a credit card industry trade publication.

We could go on, but you get the idea. Each credit card company had basically the same way of raising customers’ interest rates – and each applied the new rate to the existing balance – effectively applying a retroactive rate increase.

Most of us are unaware that if we use credit cards to pay for purchases, we can be doing real damage to our financial well being. Most Americans have no idea that if they run up their credit card bills, they also risk tanking their credit scores. *Take special note here to always keep your balances below 30% of your credit limit. Running up over that amount can hurt your credit score in a hurry. This will be addressed in a future article – Credit Cards: The Volatile Polymer.

Some of the issues that are being scrutinized by the Senate Subcommittee are: what or who determines a person’s FICO score; who decides to increase a credit card interest rate; and who actually sets the higher interest rate. What have they found out? NO ONE!

As we sit, scratching our heads on that one, millions of bits of information are streaming through the credit bureaus’ computers, determining the ever-changing FICO scores of consumers. Occasional updates are automatically sent to credit card companies, whose computers scan the scores and score factors and come up with a new rate. Sure, that’s the way it was designed. Sure, humans came up with the rules that were given to the computers in order to determine a new rate. But it is much more convenient to the credit card companies knowing that no particular person has to punch a button to put the squeeze on a customer. This automated system capable of the decision making of millions of credit card accounts has been in place for years. I’d say it’s about time for us to put our foot down. Hopefully Senator Levin has a heavy foot.