Credit card legislation considered
Many consumers who pay their credit card bills on time are being hit with unfair and confusing increases in the cards’ interest rates, senators said Tuesday, and legislation may be necessary to fix the situation if card issuers do not do so voluntarily.
In a contentious hearing, Sen. Carl Levin (D-Mich.) grilled executives from Discover Financial Services, Bank of America Corp. and Capital One Financial Corp. about the industry’s practice of raising customers’ interest rates because their credit rating had fallen, often simply after opening another credit card account. He also criticized the companies for either failing to notify customers about the rate increase or sending them a lengthy, unclear letter about the change.
“The bottom line for me is this: When a credit card issuer promises to provide a cardholder with a specific interest rate if they meet their credit card obligations, and the cardholder holds up their end of the bargain, the credit card issuers should have to do the same,” said Levin, chairman of the Senate Homeland Security and Governmental Affairs permanent subcommittee on investigations.
Tuesday’s hearing was the second the panel has held on what Levin described as “unfair credit card practices.” After the first hearing in March, he introduced legislation to restrict the ways credit card issuers can increase interest rates.
The bill, now before the Senate Committee on Banking, Housing and Urban Affairs, would, among other things, prohibit companies from increasing the rate on individuals who have paid their debt on time, and would limit penalty rate increases to seven percentage points above the current interest rate.
“December is a big shopping month,” Levin said Tuesday. “Stores, advertisers and sometimes even the president are urging shoppers to spend more. But if you shop with a credit card, as most Americans do, dangers lurk that few consumers realize could damage their financial future.”
In total, Americans carry about $900 billion in credit card debt, and an average family has five credit cards.
During the hearing, the panel heard from consumers who had charged close to the limit on their cards but had made the minimum payment, and often more, on time each month for at least two years. Despite that, they were hit with an interest rate hike.
For example, Bonnie Rushing’s Bank of America card had had an interest rate of 8% for more than three years, but on her April statement her rate nearly tripled, to 23%. Her rate increased because her credit score dropped, Levin said -- probably because she opened two store cards to receive immediate discounts on purchases.
Rushing, who lives in Naples, Fla., said she received no notice of the higher rate before her April statement arrived. Bank of America representatives were “uncooperative,” she said, so she contacted AAA, the card’s sponsor. Eventually she was able to cancel the card and pay it off at the 8% interest rate.
“The bank’s employees with whom I dealt appeared intimidating, and that disturbed me,” she told the panel. “I was not angry. I was deeply anxious by what they were insinuating about my credit and this account. The outcome of this matter was going to deeply affect how I paid my other bills and significantly impact my financial situation.”
Five financial companies -- Discover, Bank of America, Capital One, Citigroup Inc. and JPMorgan Chase & Co. -- issue 80% of America’s credit cards, Levin said. Both during the panel’s first hearing and again Tuesday, Chase, Citigroup and Capital One executives said they use only a customer’s previous payment history when considering whether to adjust interest rates. But executives with Discover and Bank of America said Tuesday that they would not change their policy of using credit scores to determine interest rates.
“Not considering other debts is like taking the batteries out of a smoke detector,” said Roger C. Hochshild, Discover’s president and chief operating officer.
Bruce L. Hammonds, Bank of America’s president of card services, said his company had increased interest rates for only 6.5% of its customers last year, while rates were lowered for 25.9% and the rest stayed the same. He argued that most of the customers whose interest rates were increase paid off their debt faster.
If credit card companies lose their ability to monitor their customers’ credit, Hammonds said, then they might end up in a situation similar to the sub-prime mortgage crisis.
“Attempts to interfere with the market here . . . will inevitably result in less credit being offered,” he said.
