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Thursday, April 23, 2009

The plastic punch down

Banks squeeze credit card holders as unemployment spikes

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L.E. BASKOW / TRIBUNE PHOTO ILLUSTRATION

Credit card companies can change the terms of the cards at any time, and are using “outrageously expensive” interest rates and “bait-and-switch” tactics, said U.S. Sen. Jeff Merkley.



Robert Strong has used his Capital One credit card more than 18 years and never missed a payment.

So the 47-year-old Southeast Portland resident was miffed when Capital One abruptly canceled his 5.99 percent fixed interest rate as of April 17 and switched it to a fluctuating rate pegged at 15.9 percent.

Shawn Daniel was laid off from his Portland job six months ago, and has since run up a $4,400 balance on his Capital One credit card, including half the cost of a recent oral surgery. He recently got a letter saying he’ll now pay a 29.4 percent interest rate if he’s three days late on payments twice in one year.

When Capital One received $3.56 billion in federal bank bailout money last fall, “it was expected that they would loosen up lending and spur spending,” Daniel said. “Many banks have decided to do just the opposite.”

Three-fourths of all American households use bank credit cards, and three-fifths of all cardholders were carrying a balance on their cards during the latest federal survey.

With one in eight Oregonians now unemployed, many are relying more on credit cards to tide them over. But as unemployment skyrockets, the mega-banks that offer the lion’s share of bank credit cards are jacking up interest rates and slashing borrowers’ credit limits, often on one to two months’ notice.

“It’s going to push a lot of people over the edge,” said Ann Chapman, a Portland bankruptcy attorney with VandenBos & Chapman. “If credit card companies are going to pull back now, then people are going to be facing bankruptcy that much sooner.”

The public needs to understand that credit card loans are the riskiest ones out there because there’s no collateral to assure repayment, said John Hall, American Bankers Association spokesman. Banks must make prudent loans, he said, so it’s no surprise they are tightening lending standards during the recession.

“We are all less creditworthy today than we were just a few months ago,” said Peter Garuccio, another American Bankers Association spokesman. Just look at your 401(k) statement and you’ll see why, he said.

Reforms proposed

But a growing number of consumers are complaining of shoddy treatment by bank credit card companies, even folks like Strong with sterling credit. Partly in response, the U.S. Senate Banking Committee recently approved a credit card reform bill that would enact the nation’s strictest consumer protections in decades.

Credit card companies can change the terms of the cards at any time, and are using “outrageously expensive” interest rates and “bait-and-switch” tactics, said U.S. Sen. Jeff Merkley, D-Ore., who sits on the banking committee and voted for the bill.

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Backers face an uphill battle getting the bill past the full Senate, Merkley said.

But the Federal Reserve Board adopted stiffer regulations in December to protect credit card consumers from unfair practices by banks. The rules will require credit card companies to wait one year after issuing a card before increasing interest rates. Banks will have to provide at least 45 days’ notice before changing penalty fees or other terms, and will only be allowed to levy high default interest rates when customers are more than 30 days late making payments.

Consumer groups are heartened by both actions, said Linda Sherry, a spokeswoman for Consumer Action in Washington D.C. But the Federal Reserve’s decision to delay the regulations until July 2010 was a “disaster,” Sherry said. Credit card companies now are rushing to raise interest rates and reduce customers’ credit limits “before they get their hands tied next July,” she said.

Strong, a government finance professional who formerly worked in the consumer credit industry, is in fine shape, because he keeps six months’ living expenses in reserves for emergencies. But when others get socked with sudden increases in their credit card interest rates, he said, they may be so deep in debt they can’t just switch to another company. And if they cancel their card, their credit rating and credit limits may suffer.

There are plenty of horror stories in the media about credit card companies, Hall said, but those anecdotes are exceptions and don’t tell the real story. Overall credit card balances are going down in the recession, he noted, as Americans reduce spending.

But those anecdotes aren’t hard to find.

Insider ‘dinged’

Chris Lombardo is western regional director of ClearPoint Financial Solutions, a nonprofit that offers consumer credit counseling in Portland and other cities. Even Lombardo, whose company receives donations from credit card companies for its consumer education programs, said he was “dinged” by Bank of America last summer. That came after he made several credit card purchases before an emergency out-of-town funeral, including buying a suit to wear.

“They upped my interest rate on the account because of what they considered to be unusual purchase history,” Lombard said. His rate jumped from about 8 percent to almost 18 percent.

Matt Raczko, who counsels clients overburdened by debts for ClearPoint in Southeast Portland, said he’s carrying a balance on his Bank of America credit card because of moving expenses. His interest rate recently shot up from 6.99 percent to 11.99 percent.

Ann Friday, a retiree in Portland’s West Hills, just learned Bank of America is raising her interest rate from 8.5 percent to 14.8 percent, though she pays her balance in full each month. “In other words, it’s them, not us, provoking the change,” Friday said.

There’s no denying times are tough for banks, trying to survive the worst financial crisis since the Great Depression. The volume of delinquent credit card debt reached a 20-year high in the fourth quarter of 2008, the American Banking Association reported. Overall, customers were more than 30 days late on paying for 5.5 percent of total bank credit card debt.

A report issued last month by the Federal Reserve revealed that 46 percent of all bank credit card customers routinely carry forward their balance each month, based on a 2007 survey. At the time of the survey, 60 percent were carrying a balance. Of those carrying a balance forward, the average balance was $7,300, up from $5,100 in the prior survey three years earlier.

Among those who seek credit counseling at ClearPoint, the average credit card balance is now $23,000, said company spokesman Bruce McClary.

Banks tightening credit

Nordstrom and other retailers offering their own credit cards independent of banks are in a different league. Gas stations and department stores risk losing shoppers if they crimp customers’ credit too much.

But banks, after years of freely passing out credit cards and raising lending limits, are doing an about-face.

Wall Street bank analyst Meredith Whitney recently predicted that bank credit card companies would cut Americans’ cumulative credit card limits in half — by $2.7 trillion — by the end of next year.

A typical scenario is for a customer to have $7,000 outstanding on his credit card, and then the bank lowers the credit limit from $10,000 to $7,100, Raczko said.

American Express recently made waves offering some customers $300 if they’d pay off their credit cards and close their accounts.

Capital One wants to keep its customers, said Pam Girardo, spokeswoman at the company’s McLean, Va., headquarters. The company, which recently raised many customers’ interest rates, is allowing people to pay off existing loans at the old rates, she said.

“The credit and lending environments are challenging,” Girardo said, “so account changes like this are necessary for us to account for the increased risk in an economic downturn.”

Bank of America periodically reviews each customer’s credit situation to decide whether his or her limits should be raised or lowered, said Betty Riess, corporate spokeswoman in San Francisco. “In response to the current economic environment, we have tightened underwriting criteria,” she said.

But Lombardo, Strong and others agreed with consumer groups that banks are rushing to make changes before the stiffer 2010 regulations take effect.

Currently, the contracts people sign for credit cards are the only contracts where one side can change the terms whenever it wants, basically without limits, Lombardo said. Even payday lenders — often castigated for predatory lending practices that keep people trapped in debt — inform customers of their fees upfront, Lombardo said.

Hall said banks really have only two options, raising interest rates and reducing credit limits, to cope with the dismal economy and customers’ lagging incomes.

However, critics find fault with other tactics.

If credit card customers try to save money by shopping at Wal-Mart or other discount stores, they can be penalized by some credit card companies, in a practice known as “credit profiling.” The companies sometimes downgrade your credit rating, Lombardo said, reasoning that you are forced to pay for basic living expenses with your credit card.

Companies might change the date when payments are due from the 25th of the month to the fifth of the month, Strong said. “Then you’re more likely to default, just because you’re used to paying it on the fifth.”

Default interest rates, triggered when people miss payments, recently have been raised to 30 percent or more.

Some banks have used remote offices to mail bills, so the bills take longer to arrive in the mail, Merkley said. That also triggers more late fees and default rates.

Consumer groups complain that when customers make purchases based on an initial interest rate, and subsequent purchases after the rate goes up, that credit card companies routinely credit all of the customer payments to the lowest-interest debts, leaving the high-interest debts alone to accrue more interest.

But that and other practices will change by July 2010, when the new Federal Reserve rules take effect.

stevelaw@portlandtribune.com

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FEDERAL RULES SET; CONGRESS WEIGHS MORE

Bankers say pending Federal Reserve Board regulations will make bank credit cards more expensive for all customers.

Consumer-rights leaders say the regulations mark a historic victory over abusive credit card companies.

The new regulations, which take effect in July 2010, would:

• Bar banks from increasing interest rates for one year on new credit cards, and then only after 45 days’ notice.

• Require bills to be sent at least 21 days before late fees are assessed.

• Require banks to give 45 days’ notice before changing penalty fees or other terms.

• Require banks to apportion customer payments on a prorated basis when borrowers’ charges were made under differing interest rates, rather than applying all the payments to the lower-interest charges until those purchases are paid off.

• Bar banks from levying higher default interest rates unless customers fail to make a minimum payment within 30 days after the payment is due.

• Require notices to customers in a more readable, understandable format.

There’s also a bill proposed in the U.S. House of Representatives, HR 627, that largely codifies the pending Federal Reserve rules into law, said Linda Sherry, spokeswoman for Consumer Action, a San Francisco consumer rights group.

U.S. Sen. Jeff Merkley, D-Ore., who has long crusaded against so-called predatory lending practices, said it will be tough mustering the 60 Senate votes needed to pass the bill over Republican filibuster threats. Three Senate Democrats represent states where credit card companies are headquartered, and tend to resist stiff new regulations, Merkley said.

“We realize there’s going to be a tremendous fight ahead of us,” Sherry said. “I think we’ll get a watered-down version, unfortunately.” go here.

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