Luann Jones was in nursing school when her husband called one day with bad news: The car was dead and, to get it fixed, they’d they would have to charge another $300 on their credit card.
The bank approved the transaction and things seemed fine until the bill arrived – showing they had gone over their credit limit. As a result, they owed about $500 in fees and credit charges.
As the Sanford, Fla., couple tried to negotiate that bill, the rates on all their other cards jumped to more than 22 percent – although none had ever been late, Luann Jones said. “We had struggled to keep them current, but then we were penalized for having one card with a problem,” she said. “Once that happened, things just got out of control fast.”
Consumer experts say such cases are becoming more frequent in this era of rising interest rates as credit card companies try different maneuvers to increase revenues.
More consumers, like the Joneses, are finding themselves subject to the “universal default” rule, an often obscure part of many card agreements that allows banks to hike rates as high as they want if customers are deemed a higher credit risk.
About 45 percent of credit card issuers now have such policies, according to a recent survey by San Francisco-based Consumer Action, an advocacy organization. That’s up from 39 percent in the last survey two years ago.
It means that if a card company checks your credit report and finds problems in another account, it can raise your rate accordingly, even if you’re in good standing with them.
A drop in credit score, late mortgage or car payment, increased debt load, bounced payment check or credit limit violation are among the things that can trigger the universal default rate, Consumer Action said.
Penalty rates are also rising, the group said, reaching 24.23 percent this year, compared to 21.91 percent in 2004.
“We feel the penalty rates are assessed too fast, often after just one late payment,” said Linda Sherry, a spokeswoman for Consumer Action. “It’s not just people in financial difficulty. Anybody can be caught in this web, say by going on vacation and missing a payment.”
But banking industry officials say consumer groups are overreacting and exaggerating the number of cases where default rates kick in.
Industry studies show that at least half of consumers don’t even carry balances and many avoid fees by making prompt payments, said Tracey Mills, spokeswoman for the American Bankers Association.
Card issuers use default penalty rates only after a credit report shows the person is a greater credit risk, she said.
“It’s not a matter that you’re penalized if you’re five minutes late with a payment and your interest rate doubles or triples,” Mills said. “It involves delinquencies serious enough to show up on your credit report. It means the consumer is exhibiting riskier credit behavior.”
Still, many consumers don’t even know companies have the right to unilaterally hit them with a high penalty rate, since the default rule is often buried in the fine print of papers that come in their statement, advocates say.
Stephen Fahlgren, an Orlando, Fla., consumer lawyer, remembers when First USA was among the first to implement the rule.
“Back then I canceled my FirstUSA First USA card immediately when it happened,” he said. “Today I’m sure I have a card like that, but like most consumers I can’t tell you which one it is.”
And the default rule is not the only threat to credit card users these days, experts say.
Average interest rates on balances are higher – now 13.3 percent, up from 12.7 percent in 2004, according to Bankrate.com, a consumer research firm based on North Palm Beach, Fla.
Late fees are increasing. Major card issuers such as U.S. Bank and J.P. Morgan Chase recently raised their fees from $35 to $39.
And in many cases minimum payments are doubling, from 2 percent of the balance to 4 percent – the result of a regulatory mandate for card companies to be more realistic in their payment policies. Historically, minimums were often so low it would take decades for consumers to get out of debt.
Overall, these developments could form a “perfect storm” that will hurt many consumers who are already struggling to make ends meet, said Howell Edwards, vice president of InCharge Institute of America, a consumer credit counseling organization.
“Some people who are already close to the margins just aren’t going to be able manage their payments under these conditions,” he said. “In our industry, we expect there to be a big fallout.”
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(c) 2005, The Orlando Sentinel (Fla.).
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ARCHIVE ILLUSTRATION on KRT Direct (from KRT Illustration Bank, 202-383-6064): credit card fees
AP-NY-10-10-05 0611EDT
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