A Rougher Ride on the Credit Card Front

The credit card business is undergoing a rapid transformation this summer, in the wake of rapidly rising delinquency rates--and the changes could mean unpleasant surprises for heavily indebted consumers.

Banks have tightened their credit standards, says Robert McKinley, publisher of CardTrak, a Frederick, Md.-based credit card newsletter.

“There’s been an actual shrinkage in credit card volume this quarter,” McKinley says. “It’s like the whole industry has suddenly switched from fifth gear to second.”

Issuers are being more strict about their rules and are rechecking consumer credit files more often to see whether their borrowers remain credit-worthy. Those who appear over-indebted--even if they continue to make all their payments on time--are sometimes unilaterally given higher interest rates or reduced credit limits.

In some cases, McKinley says, some banks may be increasing interest rates on heavily indebted customers--knowing that they no longer can easily transfer large balances to other banks. What constitutes “heavily indebted” varies depending on other loans, such as a mortgage, but revolving debt that exceeds 20% of gross income is likely to set off alarms at many card issuers.

In addition, new credit solicitations are increasingly asking consumers to play “interest rate roulette,” in which they’re not told what interest rate they’ll pay until after their credit card application is approved, says Ken McEldowney, executive director of Consumer Action in San Francisco.

Consider this vague disclosure from a Providian Bancorp (Concord, N.H.) brochure cited by the group: “Annual Percentage Rate of between 5.9% variable and 15.9% variable, to be determined for each account. The APR will be established between 2.35% below and 7.65% above the prime rate and will not go below the established rate.”

“Banks are making the case that people’s credit-worthiness is changing so rapidly that they can’t make an interest rate promise in advance,” McKinley says. “But it’s setting the stage for bait-and-switch tactics, where they get you to apply based on a favorable interest rate, but they give you a much higher rate once you get the card.”

Even if you refuse the card when you see the actual rate, you can suffer because you can get a negative credit score at credit bureaus for having too many inquiries about your credit.

“There ought to be some middle ground, where the bank can get the information they need without hurting the consumer,” McKinley says.

These moves signal a departure from industry practice over the last five years.

Largely because the industry was profitable and highly competitive, credit card issuers lowered their interest rates and aggressively vied for customers--often approving low-rate credit even for people with less-than-pristine records.

Consumers could get a card that offered a 5.9% rate for six months and keep it until the teaser expired. Then they’d take another bank’s 6.9% offer and transfer their balance. Many people borrowed heavily.

Although people who have modest debt levels and consistently pay on time still get low-rate cards, this game is becoming more difficult to play.

Some experts believe credit card companies are reacting to the fallout of their own loose policies--namely, rising delinquency and bankruptcy rates and vast increases in the consumer debt burden.

Revolving consumer debt has risen 19% in the last year to a stunning $444.4 billion, according to the Federal Reserve. Meanwhile, the American Bankers Assn. reports that late payments on credit cards jumped to 3.53% from 2.9% a year ago; and consumer bankruptcies--the primary cause of bank losses on credit cards--are likely to break records, with 252,137 nonbusiness bankruptcies reported in the first three months of 1996, a 25.7% increase from a year ago.

But people who have fallen behind or gotten a bit over their heads are finding high rates, high fees and rejections.

Pity the bank customer who breaks some rules, says Ruth Susswein, executive director of Bankcard Holders of America in Salem, Va. They can get hit with a penalty fee and a higher interest rate.

Citibank, one of the nation’s biggest credit card issuers, for example, charges a $15 fee to anyone who pays his or her bill late. The bank also sends out a warning: Do it again, and you’ll be subject to a penalty rate. What happens then? Another fee is charged, and the interest rate jumps to prime plus 12.9%. At today’s rates, that brings the penalty rate above 21%.

Citibank’s procedures are fairly standard with most major companies, McKinley adds. Far more onerous procedures have been imposed by a handful of smaller banks--even on good customers.

Consider Eileen Carty, a San Diego resident who has had a credit card with Chevy Chase Bank for 10 years. She’s never had a late payment and even calls the bank each month to make sure the post office delivered her check, she says.

Yet, last month the bank notified her that her 10.4% rate was being hiked to 25% and that this new rate would be applied to her entire balance. “I’m a longtime customer with a crystal-clear credit record and a perfect payment history,” Carty says. “It’s like they’re trying to force you into bankruptcy.”

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Owning Your Debt What do you do if your credit card issuer suddenly jacks up your rate?

* Cancel. In California and 19 other states, the law allows you to cancel your card when a major change is made to the agreement and pay off the balance based on the old rules and rates, says Ruth Susswein, executive director at Bankcard Holders of America. Because of a recent Supreme Court decision, that does not apply to banks headquartered in other states. Many of the “bad apples” simply move their headquarters to states where the rules are more lax. Even then, it usually won’t cost you much to pay off the card and tear it up.

* Switch. If you have the ability to switch your balance to another, lower-rate card, do it.

* Refinance. Can’t switch to another card and can’t pay off the balance? If you have equity in your home, you may be able to refinance the debt with a home equity loan, says Ken McEldowney, executive director of Consumer Action in San Francisco.

* Get your act together. Consumers who are having the biggest problems are those who are the most deeply in debt. Look for ways to reduce your expenses and start paying down your debts.