A U.S. Senate subcommittee on Tuesday hauled credit card companies onto the mat for their practice of using credit scores to increase the interest rates cardholders must pay.
“Credit card companies go too far when they hike the interest rates of consumers who are faithfully paying their credit card bills, just to squeeze more finance charges from them,” said Sen. Carl Levin, D-Mich., chairman of the Senate Investigations Subcommittee. “Some credit card companies are foisting interest rates as high as 25 percent or 30 percent on responsible consumers, claiming they have become greater credit risks even when those same consumers haven’t missed paying a bill in years.”
Credit card companies also often apply those higher rates retroactively to a consumer’s existing credit card debt, Levin added. “Right now, credit card companies are the only lenders allowed to retroactively change the interest rate on a consumer loan where the consumer has met their borrowing obligations,” he noted. “This unfair credit card practice needs to stop.”
If the credit card companies don’t make adequate changes of their own accord, legislation may be the next step, the subcommittee warned.
Ongoing Investigation
The hearing is the second in a series of subcommittee hearings into unfair credit card practices. The first hearing, held in March, examined the industry practices of collecting interest on credit card debt that is paid on time; imposing steep and sometimes duplicative late, over-the-limit, or other fees on consumers; applying consumer payments first to the debt with the least expensive interest charges; and imposing penalty interest rates that can exceed 30 percent.
The subcommittee’s investigation into practices at the five major credit card issuers, which collectively handle 80 percent of U.S. credit cards, found that Bank of America and Discover increase the interest rates of cardholders whose credit scores have dropped on the grounds that these consumers pose a greater credit risk, even if they have a history of timely payments to the company.
The investigation also found that Capital One has a history of increasing interest rates for consumers who pay their bills on time — regardless of their credit scores — simply as a way to pass on more of its costs to borrowers.
Citi Cards and Chase have recently discontinued the practice of imposing interest rate increases on cardholders who meet their credit card obligations.
‘Unfair Advantage’
“Consumers who play by the rules and pay their credit card bills on time shouldn’t get hit with interest rates of 20, 25 or 30 percent,” Levin said. “Credit card companies who impose those high rates are taking unfair advantage of responsible consumers.”
In May, Levin and Sen. Claire McCaskill, D-Mo., introduced the Stop Unfair Practices in Credit Cards Act, which would stop many credit card interest rate increases.
In the meantime, the credit card companies sought to defend their practices.
“The consequences of imposing severe restrictions on the ability to reprice such loans in response to these changes could include significant reductions in the availability of credit to many and higher pricing for all, particularly to those historically underserved customers who pose a higher level of risk,” said Ryan Schneider, president of Capital One’s credit card business, in his testimony at the hearing.
Universal Default
“If a customer’s risk profile increases, we may increase their annual percentage rate,” noted Roger Hochschild, president and chief operating officer at Discover Financial Services. “This is largely due to the nature of a credit card compared to other loan products — every credit card transaction can be regarded as a new loan, and we are financially responsible for every loan that is not repaid.”
Discover has also never practiced universal default, Matthew Towson, a spokesperson for the company, told CRM Buyer. Universal default is the practice of adopting the default terms for a loan when the lender learns that the consumer has defaulted on another loan.
‘Walk With Our Pocketbooks’
Consumer advocates, on the other hand, warned of the importance of vigilance on the part of consumers.
“We recommend that consumers be aware of the fine print associated with their credit card contracts,” Gail Cunningham, spokesperson for the National Foundation for Credit Counseling, told CRM Buyer. “When the fliers come in the mail associated with our statement, we usually put them in the shredder without reading them, but we really do need to be aware.”
If credit card companies do increase a consumer’s rates, the consumer “is certainly at liberty to shop around and find a lender with more suitable terms,” Cunningham added. “We can walk with our pocketbooks, and that speaks loudly.”
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