Indebted Consumers Face Rate Hikes

Some major banks have raised the credit card interest rates they charge deeply indebted consumers who are working with credit counselors to try to avoid bankruptcy, the Consumer Federation of America said Wednesday.

One of the bank companies, MBNA Corp., disputed the consumer group’s figures.

The Consumer Federation said the increases in interest charged by the financial institutions come as major banks, which own the biggest credit card networks, have cut their funding for credit counseling agencies, creating a double whammy for people trying to work their way out of debt and avoid filing for bankruptcy.

The banks “are trying to pull the rug out from underneath the last best stop before bankruptcy,” said Travis Plunkett, the group’s legislative director, at a news conference.

The American Bankers Assn. maintained that some consumers have been abusing the services of credit counseling agencies to get reduced interest rates when they can afford to repay their debts in full.

“The industry is doing more than ever to educate consumers about using credit responsibly,” ABA spokeswoman Patricia Boerger said.

The industry also has defended the funding cuts as necessary belt-tightening and as a way to force the credit counseling industry to become more efficient.

Consumer Federation officials said their figures show that four of the 10 largest companies that issue credit cards--Citibank, First USA/Bank One, MBNA and Household Credit Services--have substantially increased the interest rate they charge consumers who are in debt-management programs.

MBNA disputed the group’s finding that the company had increased its interest rate for those consumers from 10% to 15.9%.

“We work with each customer’s account individually” and charge interest ranging from zero to 15.9%, MBNA spokesman Brian Dalphon said.

In its data, the Consumer Federation noted that MBNA does consider reducing interest rates based on an individual’s circumstances.

The consumer group cited an increase by Citibank from 8% to 9.9%, by First USA/Bank One from 0% to 6% and by Household Credit Services from 6% to 9%.

Representatives of the three companies didn’t immediately return telephone calls seeking comment.