By Herb Weisbaum ConsumerMan
msnbc.com
updated 7/24/2008 12:23:35 PM ET 2008-07-24T16:23:35

You shopped around and found a credit card with a decent interest rate. You know that rate can go up if you pay late or go over your credit limit, so you’re careful to follow all the rules. Guess what?  It doesn’t matter. These days, you can be the perfect customer and still get socked with a higher rate.

Consumer Action, a nonprofit education and advocacy organization based in San Francisco, released its 2008 Credit Card Survey today. Of the 22 major financial institutions contacted, 17 (that’s 77 percent) said they reserve the right to increase a cardholder’s interest rates — even on existing balances at any time and for any reason.  

Consumer Action callers (posing as ordinary consumers) were told the interest rate could be adjusted for such nebulous reasons as “market conditions,” “the economy” or “business strategies.” In other words, if the bank wants to make more money, it can just jack up your interest rate.

“If a car dealer was having a bad year, he couldn’t raise the interest rate on my car loan, but a credit card issuer can do that,” says Linda Sherry, Consumer Action’s director of national priorities.

Sherry says credit card customers at Bank of America and Capital One have already seen rate hikes based on the “market conditions” loophole.

“We consider this to be an abusive practice,” says Ruth Susswein, who co-wrote the survey report. She says the practice is particularly bad  because the higher interest rate applies to both future purchases and the current balance. You can close your account or stop using the card if you object to the rate hike, but you still have to pay off the balance at the new penalty rate.

“You cannot know how much it’s going to cost you to pay back a credit card balance if you agree to one interest rate when you accept a card and find that the rate changes later on when you’re still paying off the balance,” Susswein says.

It’s not easy to avoid the anytime/any reason rate hike. Most of the top 10 card issuers now have that provision in their contracts.

Lots of reasons for rate hikes
All sorts of things can send your interest rate soaring to what’s called the “default” rate, the highest rate charged. These include: a drop in your credit score, late payments to another company, too many credit cards, too much debt or too many inquiries on your credit report.

Consumer Action says the average default rate is now 26.87 percent, up from 24.51 percent in 2007. HSBC had the highest default rate in the survey at 31.99 percent. Simmons First had the lowest at 15.25 percent.

Once you trigger the default rate you could be stuck with it. It’s what Consumer Action calls “default rate purgatory.” Some issuers will consider giving you a rate reduction if you have a good payment history for six months to a year. But this is not automatic. You have to call customer service and ask to have an account review.

Cutting your credit limit
Your credit card company regularly checks your credit score to see if you’ve become a greater credit risk. This information is used to decide whether to raise your interest rate (universal default) or to reduce your credit limit.

Customer service representatives at American Express, First Command, US Bank, Washington Mutual and Wells Fargo told the Consumer Action surveyors they reduce credit limits when they believe someone becomes a riskier customer. The factors that would trigger this action include late payments, balances that are too close to the credit limit or a drop in the cardholder’s credit score.

A series of bad things can happen if you don’t realize your credit limit has been lowered. You could be hit with an over-the-limit fee, and then be hit with a penalty interest rate for being over your limit.

A lower credit limit can also negatively impact your credit score because it looks like you are using more of your available credit. Statistically you’ve become a riskier customer, even if you pay on time and stay within your credit limit. That could trigger the universal default clause, which results in a sky-high penalty interest rate.

For the first time this year, Consumer Action surveyed — or at least tried to survey — the top credit unions. Susswein tells me in many cases it was “very difficult and in some cases impossible” to get information. When the surveyors were able to reach someone who could help, the credit union’s rates and terms were generally better than the competition.

Few credit card companies give consumers the right to say “no” to a rate increase. But five of the lenders Consumer Action surveyed said customers could reject a change in terms — without paying off the balance in full — if they contacted customer service within a specific time period. These issuers are: Capital One, Chase, Citi, Town North Bank, and US Bank. For this reason alone, you might want to consider a credit card from one of these companies.

My two cents
The Consumer Action survey proves once again that the credit card industry in this country is out of control. Something is very wrong when lenders can change the terms of deal — for any reason — after you’ve agreed to it.

Congress has repeatedly promised action. Lawmakers held hearings and drafted bills. It’s time to pass legislation that will outlaw these unfair and abusive practices.

Congresswoman Carolyn Maloney (D-NY), sponsor of the Credit Cardholders Bill of Rights, has this to say: “Consumer Action’s findings on card companies’ any time/any reason repricing practices are unfortunately anything but surprising. Consumers will tell you that card companies can — and do — change their minds at any time and for any reason.

“A credit card agreement is supposed to be a contract between a card company and a cardholder — but what good is a contract when only one party has any power to make decisions? Cardholders deserve more bargaining power – and my bill would give them that bargaining power."

Write your senators. Tell them to support the credit card bill in the Senate Banking Committee. Write your representatives. Tell them to support the Credit Cardholders Bill of Rights in the House. Speak up. Good customers should not get caught by credit card traps.

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