Higher rates lead to complaints

By Janet Kidd Stewart
Chicago Tribune

September 1, 2005

All may be fair in love and war, but in the sticky middle ground of consumer credit, figuring out what's fair is murky at best. At least two pending legislative proposals would curb a credit card industry practice known as universal default. In it, companies raise the interest rates charged to customers whose credit reports turn up negative information not related to that account, such as a missed payment on another card or mounting debt because of a big-ticket purchase.

Card issuers argue the practice helps them keep rates low for people who pay on time, while consumer groups call it an outrage to change the original credit terms when a customer hasn't missed a payment on the card in question.

Take Wendy Stein, for example. The 53-year-old dance instructor from Old Bridge, N.J., said her financial institution recently bumped her interest rate to 19.85 percent on her roughly $100,000 in card debt. Previously, the debt was spread between a card with a 4.9 percent rate and another with a 16.9 percent rate. Her credit limit also was recently lowered.

"I'm a good customer and never missed a payment," she said, acknowledging that the debt itself has grown substantially in recent years.

Stein said her credit score is 680--not stellar, but not in major red flag territory, either.

Should companies be allowed to boost rates charged to people whose debt is climbing into six figures? Companies tell customers upfront in credit agreements that they have the right to change rates, but consumer groups argue the practice is unfair.

"The industry finds it beneficial to practice risk-based pricing," said Tracey Mills, a spokeswoman for the American Bankers Association. Using credit scoring to identify risks allows companies to offer lower rates to low-risk customers and to offer some credit to segments of the population that didn't have access to it before, albeit at higher rates, Mills said.

The troublesome part is that consumers don't have a precise measure of how much each credit "infraction" could boost their interest rates, and banks don't say exactly what it will take to lower them, said Robert Manning, a professor at Rochester Institute of Technology and author of "Credit Card Nation: The Consequences of America's Addiction to Credit" (Perseus, $16.50).

Some credit issuers, including JPMorgan Chase, have stopped the practice, but consumer groups say customers won't be safe until protections are spelled out in law.

"There is enormous discontent with the card companies that we haven't begun to address," said Rep. Bernie Sanders (I-Vt.), who co-sponsored a bill introduced this summer that would, among other things, make it illegal for companies to change card rates because of issues unrelated to their customers' accounts.

Another bill reintroduced this summer by Sen. Christopher Dodd (D-Conn.) would, among other provisions, require issuers who are raising rates on a customer whose risk profile has changed to apply the new rates only to balances going forward.

Both measures, however, face tough opposition from the influential credit card industry lobby.

In the meantime, what should consumers do?

Start with accessing free credit reports to see what your creditors see. Call 1-877-322-8228 to order your report. You're entitled to one free report from each of the three major credit bureaus every 12 months. Linda Sherry, editorial director for advocacy group Consumer Action, recommends staggering the requests from the different credit bureaus throughout the year to get different snapshots of your credit standing.

Consumer advocates also urge customers to pay their bills as early in the monthly billing cycle as possible to avoid even a hint of a late payment.

"Until there's a law, no one's truly protected," Sherry said. "You can't predict a default on one or two late payments."

E-mail Janet Kidd Stewart at yourmoney@tribune.com.

This story ran on on September 1, 2005.