Credit card issuers are pulling back from the controversial practice of raising customers' interest rates because of missteps with other creditors.
Under so-called universal default policies, issuers can raise an interest rate if a card holder pays a mortgage or utility bill late, their credit score drops or they inquire about a car loan. Nearly 45% of credit card issuers had universal-default policies earlier this year, up from 39% two years ago, says advocacy group Consumer Action.
Some issuers are changing their policies. Citibank now lets customers opt out of the rate increase and use the card on its old terms until the expiration date. Chase no longer raises rates if card holders pay late on another bill but could still do so if credit scores drop. Discover has removed the language from its card holder agreements, and American Express, after testing the policy on a small group of consumers last year, decided not to move forward.
Increased competition is behind issuers' decisions to change these practices, says Tracey Mills of the American Bankers Association. But anger among some consumer groups and legislators also may be having an effect. At least three bills in Congress would ban issuers from raising rates to as much as 30% based on information from other creditors.
Consumer complaints about credit card fees are expected to rise 7% this year at the Office of the Comptroller of the Currency and 24% at the Federal Deposit Insurance Corp., the agencies overseeing banks. "I'm glad to see that some banks are scaling back on this practice, but we've got to go forward with legislation," says Rep. Bernie Sanders, I-Vt., who sponsored two bills to outlaw universal default. "We can't bank on the goodwill and good intentions of these credit card companies." Sen. Chris Dodd, D-Conn., also has a bill pending to prohibit the practice.
The policy changes come as credit card fees set records. In 2005, penalty fees — such as those for late and over-the-limit charges — are expected to be up 11% to $16.5 billion, bringing total fee income to $54.9 billion, says R.K. Hammer, a bank-card advisory firm. Consumers still may need to do some work to avoid a rate increase.
Some card issuers will set a deadline for customers to refuse a policy change. Miss that, and you could be stuck with the higher rate. Issuers also can change the card terms at any time. So, even if your bank doesn't have a universal-default policy now, that doesn't mean it won't adopt it in the future.
"You don't want to be lackadaisical about checking your bill," says Linda Sherry of Consumer Action.