Punctual Credit Card Payers Rewarded With Higher Interest Rates

Punctual Payers Rewarded by Card Companies With Higher Rates
Email | Print | A A A

By Alexis Leondis

Feb. 13 (Bloomberg) -- Mel Brandt said he got a Citibank Home Depot MasterCard for its rewards program. His reward for paying on time was an interest rate increase to 19 percent from 12 percent.

“If I didn’t opt out and close the account, I’m afraid the interest payments would snowball and I would default,” said Brandt, 52, a self-employed house painter in St. Louis, who relies on credit cards to fund his painting business.

Lenders came under fire yesterday in a U.S. Senate Banking Committee hearing for raising interest rates, adding fees and cutting credit lines even for consumers perceived to be low- risk with high credit scores, practices that Connecticut Democrat Christopher Dodd, the chairman, called “gouging.”

Consumers are paying more as the federal funds rate, or the interest rate banks charge each other for overnight loans, is as low as zero and U.S. lawmakers have agreed to a $789 billion economic stimulus plan funded by taxpayers.

Rates for consumers should be falling faster than they are, yet banks, facing an increase in defaults and a decline in consumer spending, are “still very reluctant to pass lower rates or increased credit access to consumers,” said Ben Woolsey, director of marketing and consumer research at CreditCards.com, an online resource for credit-card users.

The average interest rate charged on existing credit-card balances was 13.4 percent, down from 14.4 percent a year earlier, according to the Federal Reserve’s December G19 report, which tracks rates for credit-card accounts. The prime rate, which most variable credit-card rates are linked to and follows the federal funds rate, has decreased to 3.25 percent from 6 percent last February.

Rate Changes

Rate changes announced by New York-based Citigroup Inc., the biggest U.S. credit-card lender, American Express Co. and Charlotte, North Carolina-based Bank of America Corp. are intended to reduce risk and raise revenue, said Woolsey, who is based in Austin, Texas.

Citigroup’s charge-off rates of loans increased by 88 percent, climbing to 7.81 percent in December, up from 4.16 percent a year earlier, according to data compiled by Bloomberg. American Express’s charge-off rates rose 118 percent, from 3.32 percent to 7.23 percent while Bank of America’s rates increased from 5.24 percent to 8.45 percent, a 61 percent jump. Charge- offs are loans the banks don’t expect to be repaid.

Costs Fluctuate

The cost of funding for credit cards fluctuates with economic cycles, said Peter Garuccio, a spokesman for the Washington-based American Bankers Association. The cost of funding for issuers has increased as one of their sources of capital, credit-card income streams sold to investors, has dried up, Garuccio said.

“In order to keep credit flowing in a responsible way, we had to change rates on these cards,” said Citigroup’s chief executive officer, Vikram S. Pandit, at a House Financial Services Committee hearing in Washington on Feb. 11. Citigroup and Bank of America have each received $45 billion from the Troubled Asset Relief Program.

Citigroup is changing rates for consumers who haven’t been reset in at least two years and is offering its customers the option to cancel their cards and pay off existing balances at the original rate, according to Samuel Wang, a spokesman for Citigroup.

Kenneth Lewis, Bank of America’s CEO, said during the hearing that nine percent of the bank’s customers had their interest rates increased in 2008. The figure includes customers who had a rate increase because of a default or change in credit profile, which may include external credit risk, said Betty Riess, a spokeswoman for the bank.

Rate Hikes

The majority of American Express cardholders saw interest rates increase by 2 to 3 percentage points in December, said Desiree Fish, a spokeswoman for the bank.

“I felt like my credibility was in doubt, despite my 20- plus years of on-time payments,” said Donald Neville, a 54- year-old regional sales manager for industrial machineries. Neville, who lives in Swedesboro, New Jersey, said he no longer uses the card for purchases and is just paying down the balance.

There is the risk that increasing rates on borrowers who are already struggling with payments may result in more defaults, said Linda Sherry, director of national priorities at Consumer Action, a Washington-based advocacy group. “Sudden rate hikes across a broad swath of cardholders can bust family budgets,” Sherry said.

Risk-Modeling

The banks use risk-modeling systems to predict the likelihood of default, said Garuccio of the ABA.

Michael Megeath, a Treasury analyst in Tulsa, Oklahoma, has five credit cards and has accumulated more than $40,000 in debt. He said he has tried to negotiate with American Express to decrease the 13 percent interest rate on his Amex Blue Card.

“If a bank raises the interest rate on a person with a lower credit score, even though he’s current on all of his payments, it will cause the financial collapse of the cardholder,” said Megeath, 61. “Who’s going to bail me out?”

The Federal Reserve approved provisions in December that include 45-days’ notice for rate increases, instead of 15 days, and 21 days to pay a bill. The rules are effective July 1, 2010.

The Fed’s measures dovetail with legislation introduced by Dodd. The bill would prevent “any time, any reason” rate increases, according to a summary of the bill.

“At a time when our economy is in a crisis and consumers are struggling financially, credit-card companies in too many cases are gouging them, hiking interest rates on customers who pay on time and consistently meet the terms of their credit-card agreements,” Dodd said at the hearing yesterday.

“Winter sets in and jobs evaporate,” said Brandt, the painter. “This month may be the last that I can or am willing to make these card payments.”

To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net.

Last Updated: February 13, 2009 00:01 EST
Advertisement: Mozy Online Backup Industry Leading Online Backup. Unlimited Space - Only $4.95/month! www.Mozy.com