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Congress debates new credit card law

A Catch-22 for consumers came sharply into focus Thursday at a testy congressional hearing on a proposed Credit Cardholders Bill of Rights, with several witnesses testifying that they were hit with hidden penalties simply for shopping around for better rates.

Banks often answer complaints about alleged misbehavior by saying that unhappy consumers can simply switch to a new bank. But Steve Autrey, a consumer from Fredricksburg, Va., testified before the House Financial Institutions and Consumer Credit Subcommittee that opening a new credit card and closing an account both hurt your credit score. That leaves consumers faced with sudden, unexplained interest rate hikes with no good options, he said.

"It's an unchallenged scheme where consumers are penalized when they choose to close their account," he said.

Autry said the “fixed” 9.9 percent rate he had on his Capital One credit card for seven years was increased to 15.99 percent in 2007. He complained that he has yet to receive an explanation for the increase, even though he asked for one last year. In a letter, Capital One stated simply that the business environment had changed, he said.

"I assumed that fixed meant fixed,” he said. “...These unilateral, or one-sided agreements are unfair. What if my business environment had changed? Could I write them a note saying, 'I'm going to cut the interest I pay to you by half?'"

When asked why he didn't close the account and move to another issuer, Autrey replied that "It's just not that easy."

Credit counselors and financial experts often advise clients that closing a credit card account is among the most self-destructive steps a consumer can take because it always negatively affects their credit score. Autrey said he was advised against it by his mortgage broker last year when he was applying for a home loan. He was also advised against opening new credit cards, because that too would ding his credit score.

Autry’s testimony – and testimony from several other consumers frustrated by credit card issuers practices -- was delayed last month when banks demanded that the consumers sign a waiver allowing company officials to discuss private account information in public. With a compromise in place that limited the disclosure, three consumers returned to testify Thursday.

In a rebuttal to Autry's testimony, Capital One said that he was provided clear notice of the interest rate change and given the opportunity to pay off the balance at his old rate, as long as he never used the card again.

Don't go near the edge

Another witness, Susan Wones of Denver, complained about a different Catch-22. She said her interest rate jumped on her Chase credit card from 15 percent to 25 percent when her balance grew to near -- but still under -- her credit limit. Because Wones was running short on available credit, Chase considered her a higher risk and raised her rates, even though she was making her payments on time. That made Wones wondered what the point of a credit limit is.

"I don’t think it's fair for me to pay my bills on time under the rules set forth and have me be penalized for that," she said.

Autry complained about the same practice.

"You are not allowed to use up to the credit limit,” he said. “You have to leave some room. It seems to be a trap."

Chase issued a statement saying that Wones' overall credit profile had “deteriorated,” and her rate was raised under standard Chase policy at the time. The policy, called universal default, has since been eliminated by Chase -- but Wones' interest rate increase was not remains.

Retroactive interest

Another practice criticized at the hearing involves the retroactive imposition of rate increases on existing credit balances. When consumers carry a balance -- as nearly 50 percent of cardholders do -- and their rate is increased, the new rate applies to the entire balance, even that portion that was borrowed under the lower interest rate. The Credit Cardholders Bill of Rights, introduced by Rep. Carolyn Maloney, D-N.Y.. would ban that practice.

"The core principle of my bill is that cardholders should not be trapped by interest rate increases they did not agree to and that are applied retroactively to their existing debt, causing it to balloon," she said. "I believe it is a much-needed correction to a market that has gotten wildly out of balance."

Risk pricing defended

Not all federal regulators who testified at the hearing agreed, however. Julie Williams, chief counsel for the Office of the Comptroller of the Currency, said card issuers need the flexibility to "reprice" old balances when their risk changes.

"We have concerns that some provisions (of the proposed law) would deprive lenders of the option to protect themselves from the changing risks presented by unpaid balances," she said. The OCC favors enhanced notification of interest rates changes but opposes limitations on interest rate increases.

The American Bankers Association also raced to the defense of the credit card industry.

“We are concerned the proposed legislation would create a host of negative, unintended consequences, including more expensive credit for all consumers,” said CEO Edward Yingling in a statement. “Many of the credit card practices Congress is attempting to curtail through legislation allow credit card issuers to provide worthy borrowers with low-interest rates, no annual fees and broad access to credit.”

While speaking in support of the legislation, Sen. Ron Wyden, D-Ore., urged even more comprehensive reforms. He and presidential candidate Barack Obama, D-Ill., have proposed a new ratings system on credit card issuers to be maintained by the Federal Trade Commission.

"If all we do is ban these egregious practices what will happen is this industry, which has always been one step ahead of regulators, will just figure out how to create a bunch of other egregious practices," he said.