30% interest? State rules leave consumers defenseless

USA Today
Aug. 18, 2005

What if you got a letter announcing that your 30-year mortgage rate had tripled, say from 6% to 18%, even though you'd been paying it on time? That couldn't happen, of course, unless you'd agreed to such onerous terms in the papers you signed with your lender.

But credit cards exist in a different realm, one governed by state laws carefully crafted to attract and benefit card issuers. Cards are loosely regulated, and some fine-print agreements say that issuers can change the rates "at any time, for any reason."

These days, they often do.

Several top issuers now hit consumers with rates just shy of 30% - rates that would be considered usury in most states but aren't in South Dakota and Delaware, which have no rate ceilings and are home to some of the largest issuers.

Adding to the unfairness, consumers can get punished for insignificant slips or none at all. Issuers, who periodically review how consumers handle other bills and how much they owe, can decide that a consumer is a worse risk today than yesterday. Even if the consumer is paying that issuer on time, the company may jack up the rate. Still worse, the unexpected hike applies to old balances.

The results can be devastating to consumers, and counterproductive even for the credit card companies when they push their customers over the edge.

Judy Reid, of Johnson City, N.Y., told USA TODAY she was juggling several large bills and paying on time. Last January, the rate on one credit card nearly doubled to 29.49%, despite her good record. The company told her something in her credit report triggered the increase. Her new monthly minimum of $544 was more than she could handle. In April, she reluctantly declared bankruptcy.

Such rate hikes have become common. A survey released last month by Consumer Action, a consumer advocacy group, found that 45% of the banks surveyed raised consumer rates based on unrelated financial activities. The most common trigger? A falling credit score. Other reasons included too much debt, getting a new credit card or inquiring about a car loan or mortgage.

Several members of Congress have become so incensed by these tactics that they are pushing bills to either prohibit this type of hike or at least ensure that the higher rates do not apply to past balances. Given the issuers' clout in Washington, it will be an uphill battle. The most recent congressional action, championed by the credit card companies, was to make it harder for consumers like Reid to escape debts by declaring bankruptcy.

The American Bankers Association argues that banks must monitor customers' broad financial picture and raise rates to cover risk. That would be a lot more credible if card issuers weren't inundating consumers with mailings offering low "teaser" rates that quickly escalate. Or automatically increasing credit limits to astronomical levels. Or extending credit freely to many borrowers with marginal ability to pay.

Rates nearing 30% are abusive. If the credit card companies want to distinguish themselves in the marketplace from loan sharks, they ought not use flimsy excuses to jack up interest rates and suck their customers dry.