What rate cuts? Use of plastic gets pricier

Borrowing money has become cheaper for banks after a series of aggressive rate cuts by the Federal Reserve. So why are many people’s credit cards growing more expensive?

Hundreds of thousands of Capital One and Bank of America cardholders have been notified in recent months that their interest rates are going up -- in some cases to as much as 28% -- even though they haven’t been missing payments.

Cardholders are being told they can “opt out” from the higher rates by paying off their balances and taking their business elsewhere. But that’s not really an option for people who may not have thousands of dollars in spare cash sitting in a drawer.

If anything, people’s credit card rates should be heading south following repeated cuts in interest rates at the federal level. So far this year, the federal funds rate has been reduced by 1.25 percentage points and now stands at 3%. Further cuts are expected as the economy slides toward recession.

The Fed funds rate is an overnight lending that banks charge to each other. It influences the interest consumers pay for credit cards, home equity lines and car loans.

David Robertson, publisher of an influential credit card trade publication called the Nilson Report, said a number of factors determine rates for plastic, not least the greater risk of delinquencies these days resulting from the credit crunch.

But he said it seems clear that leading banks, having suffered billions of dollars in losses from the mortgage meltdown, are casting about for new sources of revenue.

“They need to raise rates because they can’t raise fees anymore,” Robertson said. “It’s politically untenable.”

Politics also seems to be behind a subtle shift in language that’s appeared in the terms and conditions of several top card issuers. Increasingly, lawmakers have been taking a skeptical view of banks’ long-standing insistence that they can raise people’s rates at any time for any reason.

Citibank announced last year that it would no longer make this claim. Instead, the bank now says people’s rates may rise because of “general market conditions.”

Similarly, Capital One introduced language last year asserting that cardholders’ rates could go up “if market conditions change.”

More broadly, BofA declares that credit card rates could increase due to “market conditions, business strategies or for any reason.”

Betty Riess, a BofA spokeswoman, said “market conditions” could refer to changes in interest rates. She declined to say what else it could refer to.

Pam Girardo, a Cap One spokeswoman, said the phrase “market conditions” was introduced to the company’s credit card terms “solely because it is shorter” than other possible wordings.

“ ‘Market conditions’ basically means changes to the rate environment and/or our cost of funds,” she said.

If that were the case, though, card rates should be dropping in tandem with the Fed funds rate.

Since that’s not happening, it’s apparent that “market conditions” can mean virtually anything.

Kind of like “at any time for any reason.”

“Issuers are trying to use a new phrase that looks like there’s some economic formula being used to raise rates,” said Bill Hardekopf, chief exec of LowCards.com credit card comparison website. “But they still have the freedom to do whatever they want.”

San Dimas resident David Williams got a taste of this last month when he received a letter from Capital One informing him that his 9.9% annual percentage rate would be jumping to 15.9%.

“I don’t make any late payments,” he told me. “I have a good credit score. There was no basis for a higher rate.”

When Williams, 54, called Cap One to find out the reason for the rate hike, he said he hit a brick wall.

“The service rep couldn’t give a solid reason,” he said. “Basically, they just did it.”

The Nilson Report’s Robertson said higher rates reflect a fundamental shift in how card issuers operate.

“The card issuers are moving from a risk-management strategy to a revenue-generating strategy,” he said.

“Credit cards are consistently the most profitable retail banking product,” Robertson observed. “The growth is not there anymore. And with a recession coming down the pike, there’s no expectation of more spending by consumers. The industry needs to raise prices to keep profits where they need to be.”

Put that in your market conditions and smoke it.

Ken Clayton, managing director of card policy for the American Bankers Assn., said it’s understandable why market conditions would be a factor for rate hikes.

“A card company needs to manage its risks in an ever-changing economic environment,” Clayton said. “Lenders need to be able to secure the right to deal with the risks that are posed.”

Williams, the Capital One cardholder, said the thing he finds particularly galling is that Cap One comes out ahead no matter what.

“They’ll either get more money from me through the higher rate, or they’ll get me to pay off my $3,000 balance when I leave as a customer,” he said. “They obviously need the money, and they get something out of me either way.

“It’s just unfair,” Williams added. “The credit card companies always win. They never lose.”

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