Ahead of new law, banks are gouging

MarketWatch

CHICAGO — If you’re one of the millions of Americans holding a credit card, this isn’t necessarily news: Credit-card issuers are raising interest rates, penalties and fees in full force ahead of stringent new laws that take effect in February.

In fact, 400 credit cards from the nation’s 12 largest bank issuers — accounting for 90 percent of the $889 billion in outstanding consumer revolving credit — are still using most of the same tactics that the Federal Reserve has called “unfair or deceptive” and that will be outlawed in fewer than four months, according to a new report from the Pew Health Group’s Safe Credit Cards Project.

“Until the law takes effect, we’re seeing that all the major credit-card issuers on the bank side are continuing to engage in these unfair and deceptive practices,” said Nick Bourke, project manager of the Safe Credit Card Project. “The numbers of unfair and deceptive practices have grown and in some cases are worse.”

Among the other findings:

U99.7 percent of bank cards allowed issuers to boost interest rates on outstanding balances — a jump from 93 percent in December.

U95 percent of bank cards are applying payments first to low-rate balances, a practice the Federal Reserve has said will likely cause substantial financial injury to consumers.

U90 percent of bank cards had penalty-rate increases with the vast majority imposed by so-called “hair triggers” of one or two late payments in a year. The median bank penalty rate was 28.99 percent.

As of July, interest rates spiked an average of 20 percent across the board from December of 2008 with some issuers jacking up rates 30 percent and in at least one case 50 percent — even on their best customers.

Many — but not all — of the interest-rate increases were tied to user credit scores.

There’s no question that the economic malaise and the millions of people without jobs has had a damaging effect on credit companies, too. Credit-card charge-offs and delinquencies this year have doubled, even tripled in some cases, and are still hovering in record territory at the nation’s largest banks with the outlook only worsening. Credit-card charge-offs retreated in September from August’s record high, but are still in double digits, according to Moody’s Investor Service.

The American Bankers Association agreed that some higher rates are being pushed ahead of February, but said the embattled economy that is leaving issuers with boatloads of unpaid, unsecured debt is the real driver of such huge interest-rate increase.

“We have to take into account the losses in the credit-card space,” said Peter Garuccio, ABA spokesman.

J.P. Morgan Chase, the nation’s largest credit-card lender, reported that its credit-card division lost $700 million in the third quarter and expects losses to be higher next year. Bank of America’s global card-services division reported a loss $1.04 billion in the third quarter and Citi Holdings, which includes the private-label cards, mortgages and other consumer loans, showed a $1.9 billion quarterly loss.

Credit-card companies recognize the pain they are inflicting. “We understand that customers don’t like price increases, especially in difficult economic times,” Citi said in a statement. “However, these actions are necessary given the doubling of credit-card losses across the industry from customers not paying back their loans and regulatory changes that eliminate repricing for that risk.”