After hearing from people beset with debt after sudden interest rate hikes on their credit cards, lawmakers today pushed credit card companies to make it easier for consumers to understand their card terms and avoid surprising rate increases.
Credit card companies usually determine customers' interest rates based on their risk profiles, or how likely they are to make their payments on time. But those interest rates can go up—often unbeknownst to customers—because of credit score declines, getting close to credit limits, or being late on payments (even on cards from other issuers). If the interest rate goes up and customers don't like it, they have the option of paying off the balance and closing the card. Yet customers often don't realize they have this option until their debt has already ballooned.
Janet Hard, a Freeland, Mich., mother of two teenage boys, told the Senate Permanent Subcommittee on Investigations that she was surprised when she noticed the balance on her Discover card was no longer going down, despite her regular payments. She found that even after making the minimum payments on the card each month, the interest rate on her balance increased from 18 percent to 24 percent because her credit score—for reasons unrelated to Discover—had dropped.
Hard said she had used the card to make ends meet while raising her sons and planned to pay it off once they were grown. But after the rate hike, that seemed impossible. Hard said Discover did not notify her in advance of the rate increase, which meant she had no opportunity to close the card instead of paying such steep interest rates.
Democratic Sen. Carl Levin of Michigan, chairman of the subcommittee, said that it seemed "unfair" for credit card issuers to raise customers' interest rates if they paid their bills on time. He pointed out that other card issuers, such as Chase, have said that they will no longer raise interest rates based on changes to credit scores. He and Sen. Claire McCaskill, a Missouri Democrat, have introduced a bill that would limit the reasons for which credit card providers can raise interest rates.
The credit card industry has argued that making it more difficult to raise rates on high-risk groups will end up increasing rates for all consumers, essentially spreading companies' risk out over a larger group of people. "Risk-based pricing has democratized access to credit," Bruce Hammonds, president of Bank of America Card Services, told the subcommittee. Without it, he added, fewer people would have access to credit, and those who did would pay higher interest rates.
Roger Hochschild, president and chief operating officer of Discover Financial Services, said Hard's rate went up to 24 percent at least partly because she was deemed to be a higher risk after her credit score dropped.
A credit score, even when it changes for reasons unrelated to Discover payments, offers important information on how much of a risk a customer poses, he said. Ignoring those kinds of factors, he added, is like "taking the batteries out of a smoke alarm."
In addition to the pending legislation, the Federal Reserve is considering a rule change to make disclosure of credit card terms more uniform and easier for consumers to understand.