Surprise Jumps in Credit Rates Bring Scrutiny
By JENNIFER BAYOT
nytimes.com
The toughest diagnosis that Matthew Hajzl made last month was on his credit card statement.
A doctor in Batavia, Ill., he discovered that the interest rate on his MasterCard had nearly tripled, to 16.99 percent from 6.2 percent. Dr. Hajzl asked the card issuer why, noting that he had always paid on time and kept within his credit limit.
The issuer, Bank One, replied that his creditworthiness had somehow changed and that it reserved the right to raise his rate accordingly. The culprit, Dr. Hajzl realized, was the mortgage on his new house.
A provision now built into most card agreements allows the companies to reset anyone's interest rate based on the size and status of other debts. And improvements in information technology and a change in federal law have spurred card companies in the last couple of years to check their customers' data regularly, not only when they review applications or notice missed payments.
Concerned that consumers have not been adequately informed about the practice and that the sharp jumps in rates may be unreasonable, some federal and state legislators are proposing limits.
"Such practices increase the cycle of indebtedness, poison customer relations and spur bankruptcies that hurt borrowers and creditors," said Representative Carolyn B. Maloney, Democrat of New York.
Congress needs to decide by the end of the year whether to reaffirm a crucial section of the federal law governing the use of personal credit reports by lenders. Some lawmakers would like to give states more power to restrict rate changes, and others want to limit how companies can use a person's credit information. Hearings began this month and are to continue this summer.
Ms. Maloney and another member of Congress, Representative Bernard Sanders of Vermont, say they each plan to introduce legislation restricting rate increases.
A few states, including California and New York, are also considering measures that would limit lenders' access to credit information or require additional disclosure before they could change someone's rate.
Card companies say they are taking prudent action to increase the rates of cardholders who show signs of financial strain. They still look mainly at customers' payment records with them, they say, but add that the sophistication of today's credit reports — consumer profiles that incorporate data from several lenders — also allows them to change rates based on other factors.
So if someone misses payments on an American Express card, the interest rate on his or her Citibank card balance may jump. To a lesser extent, taking out a car loan or mortgage, or applying for other credit cards, can set off a rate increase because a new loan can stretch a borrower's ability to repay debts.
Three out of four card companies now use credit reports to reconsider cardholders' revolving interest rates, industry experts said. Those who do include some of the biggest card issuers, like J. P. Morgan Chase, American Express, MBNA and Capital One. And the card companies say they are checking on their customers more often, sometimes every month.
"It's an industry standard now," said Robert Hammer, chairman of R. K. Hammer Investment Bankers, a consulting firm in Thousand Oaks, Calif., whose clients include 15 of the 20 biggest card-issuing banks.
While each credit card issuer decides which factors warrant a rate change, virtually all companies keep tabs on a cardholder's credit score, the single number calculated to represent the information in a credit report. The score ranges from 300 to 850, with higher numbers designating more creditworthiness.
That may alert them to customers like Jim Voyles of Chico, Calif. Mr. Voyles, 40, acknowledges that he has made late payments and pushed the spending limits on some of his credit cards over the last few years.
Still, when Providian Financial last year raised his interest rate to 29.99 percent from 19.99 percent based on a low credit score, he considered the size of the increase excessive, especially given his clean record with Providian.
"Out of all my credit cards, Providian was one that I never was late for," he said. "Now, I am in bankruptcy, because — 29 percent? Would you pay 29 percent?"
Providian declined to comment on Mr. Voyles's account. Like other card issuers, it said that raising rates was a way to compensate for the money it would probably lose to customers with weakening credit.
Many card companies note that auto insurers raise the rates of drivers cited for speeding because those drivers are deemed more likely to have accidents and require big payouts. |
