Rein in credit card industry

It wasn't the sudden jump in interest rates two months ago that bothered Roland Salamon the most, though he was plenty galled that MBNA had doubled his rate -- from 9.99 percent to 19.99 percent -- when he'd never skipped a MasterCard payment in 15 years.
Nor was it the vague explanation he got when he called to complain, or the insulting attempt to mollify him with a 16.99 percent rate.
No, what most bothered Salamon was what arrived in his mail the very next week, after he'd paid off his balance and told MBNA to get lost: a new card offer from the very same Wilmington bank -- at 4.7 percent interest for the next eight months.
"Of course, they reserved the right to change the rate at any time and for no reason," he scoffs.
A math teacher and antiques dealer in Susquehanna, Pa., Salamon wants to add his name to a growing chorus of cardholders and consumer advocates -- joined recently by a bipartisan group of Congress members -- who accuse the credit-card industry of bait-and-switch tactics.
How they work
The bait goes out in about 5 billion credit-card offers sent to consumers each year, luring them with attractive teaser or long-term rates.
The switch comes when the card issuer finds a reason to raise rates for some cardholders even though they've met all their direct obligations under the credit-card contract: They've paid on time, paid the amount requested, and stayed within their credit limits.
Satisfied with the banks' explanation that they're within their contractual rights, regulators have so far failed to crack down on the practice. Virtually all credit-card contracts nowadays allow card issuers to raise rates based on periodic reviews of credit reports and credit scores.
But there's a glimmer of hope for angry consumers such as Salamon. With parts of the 33-year-old Fair Credit Reporting Act up for renewal this year, the system's flaws are increasingly in the spotlight.
Even the Bush administration is proposing pro-consumer improvements, perhaps to take the sting out of its support for what lenders want most: provisions that would permanently bar states from enacting their own tougher financial-privacy protections.
Whatever the motive, some changes supported by the administration would be welcome.
What's needed
One would give individuals free access annually to a credit report and credit-score information. Though consumers in a few other states are already entitled to this, those elsewhere have to pay.
Another change would address some of the bait-and-switch accusations without outlawing the practice, by allowing the Federal Trade Commission to expand the circumstances that trigger a key protection for consumers when credit information is used against them: a notice of "adverse action."
The notices are valuable because they entitle you to a free copy of the report used to justify the action. Sometimes they're a red flag to an error in your credit report. They may even be the first clue that you're a victim of identity theft.
Currently, though, only consumers who are denied credit or insurance outright are entitled to such a notice. The warnings are not triggered in a circumstance far more common nowadays: when you've been "preapproved" for a credit card at a rate of 8 percent and then get a card with a rate of 12 percent or 15 percent.
The FTC wants these situations -- it calls them "counteroffers," though I'd use less-polite language -- to also trigger adverse-action protections.
Not enough
That's a step in the right direction that doesn't go far enough, especially when you consider how credit scores can be used to consumers' disadvantage.
In Salamon's case, for instance, simply using more of the credit offered to him was apparently enough to lower his score and trigger a rate increase. If he has done nothing wrong, why should he have to pay 20 percent interest on money he borrowed expecting a 10 percent rate? A better solution would be to bar the use of such data to raise rates on customers who remain in good standing on the account in question.
There's also disturbing evidence that some card issuers may be gaming the system with tactics that can cut their own cardholders' scores and make them look less creditworthy to competitors -- turning them, in effect, into captive customers.
Troublesome omission
A hint of this came to light recently when Capital One told the American Banker that, for "proprietary reasons," it doesn't report credit limits to the credit bureaus when it reports cardholders' balances.
Without that number, the credit-score models have to either ignore those cardholders' balances or guess at their credit limits. According to a Federal Reserve study this spring, one method of guessing is to plug in a person's highest balance.
This can make it look as if the cardholder has maxed out the account, or used most of the available credit. Either would cut the credit score of anyone whose card use is more prudent.
The same Fed study said that about 70 percent of consumers in its sample had a missing credit limit for at least one revolving account.
The potential harm to consumers is incalculable. But the timing is right for Congress to act to reduce it.
XJeff Gelles is a columnist for The Philadelphia Inquirer. Write to him at: The Philadelphia Inquirer, P.O. Box 8263, Philadelphia, PA 19101 or e-mail consumerwatchphillynews.com.