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It's time to hold credit card issuers to account

Customers who pay on time are being socked with usurious rates even as lenders are getting federal bailouts. Now Congress is moving to halt the industry's practice of raising rates at will.

March 04, 2009|DAVID LAZARUS

Mark Huba is one of numerous Capital One cardholders nationwide who pays his bills on time and hasn't missed any payments -- yet has just been notified that his interest rate is soaring to almost 18%.

Cap One's rate hikes are the latest example of how the credit card industry is turning the screws on customers even as many of those same lenders receive billions of dollars in taxpayer-funded bailouts.

Huba, 38, is an account manager for DS Waters of America Inc., the bottled-water company that owns Sparkletts, Alhambra and other well-known brands. He's been a Cap One cardholder for 12 years and carries a balance of about $1,700.

In other words, at least from Cap One's perspective, he's a model customer.

So Huba was astonished to receive a five-page pamphlet from Cap One recently informing him that his interest rate would rise next month to 17.9% from 9.9%. It also said that if Huba missed a due date by more than three days twice in a single year, his rate would soar to 29.4%.

The pamphlet blamed the rate hikes not on anything Huba did but on "extraordinary changes in the economic environment."

That's another way of saying Cap One lost $1.42 billion in the last three months of 2008 and, like most other lenders, is now looking for any way to boost revenue -- even if that means stepping all over once-loyal customers.

"If I treated my customers like that, I wouldn't be in business," Huba said. "I'll probably close my account and never use Capital One again."

Pam Girardo, a Cap One spokeswoman, said customers have until mid-April to decide whether they want to accept the new terms or close their accounts. If they choose to walk away, they'll have to pay off the outstanding balance and forfeit any rewards their card may have accumulated.

"Because the credit and lending environments continue to be challenging, the account changes are necessary in order for us to appropriately account for the increased risk of lending to consumers during the downturn," Girardo said.

The crappy economy means default rates are rising for card issuers and could hit a record 10% this year. But it seems like a decidedly shortsighted approach to punish those customers who still pay their bills and haven't shown themselves to represent any greater risk.

Yet Citigroup Inc. recently informed cardholders that their interest rate could rocket to almost 30% if they missed a single payment, and JPMorgan Chase & Co. said it would start charging a $10 monthly fee to those who've carried large balances for more than a couple of years.

Most lenders have declined to say how many customers have been hit with higher rates. But consumer advocates place the number in the millions.

Insult to injury: Citi has received $45 billion in bailout cash from taxpayers. Chase has gotten $25 billion. And Capital One Financial Corp. has pocketed $3.55 billion.

Meanwhile, some card issuers are going so far as to raise people's rates and not even make a pretense of blaming it on tough economic conditions. Los Angeles resident John Concannon, 61, told me that Advanta Corp. had just jacked up his rate to 27.9% from 7.9%.

Like Huba, he said he doesn't miss payments and always pays his bills on time. But when Concannon called Advanta to ask why his rate had just gone through the roof, he said the company clammed up.

"They refused to tell me why," he said. "They said it was for proprietary reasons."

Yeah, that's a trade secret you wouldn't want getting into the wrong hands.

Tom Taulli, an Advanta vice president, said he couldn't comment on individual cardholders or on what the company's service reps might be telling people. But he acknowledged that rates had gone up recently for Advanta customers. "We periodically look at our portfolio based on what's going on with the industry and the economy," he said.

The Federal Reserve is attempting to curb runaway rate hikes by limiting lenders' ability to charge more for existing balances and requiring 45 days' notice for any changes to contract terms. However, the Fed's new rules don't take effect until July 2010 -- nearly a year and half from now.

Clearly help is needed for cardholders sooner rather than later. That's why Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, has introduced legislation that would immediately end the credit card industry's practice of raising rates at any time and for any reason.

At a committee hearing Tuesday, he called for "sweeping reform of abusive credit card and mortgage lending practices," and asked whether a new regulatory agency is needed to focus exclusively on protecting consumers from rapacious lenders.

My hunch is that most cardholders already know the answer to that question.

Cap on payday loans

Speaking of legislation that can't be approved quickly enough, Sen. Richard J. Durbin (D-Ill.) reintroduced a bill last week that would put a halt to payday lenders' triple-digit interest rates.

The legislation would cap payday lenders' rates at 36% annually. That's still an absurdly high amount, but it's a whole lot better than the 400% annual rate that many payday lenders now charge.

Members of the military already enjoy such protection. Durbin's bill essentially would provide the same safeguards to everyone -- and would allow individual states to impose even tougher limits.

California's usury law limits interest on most consumer loans to 10% annually but exempts payday lenders from the provision. That's a loophole we can close.

What's stopping us?

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David Lazarus' column runs Wednesdays and Sundays. Send your tips or feedback to david.lazarus@latimes.com.

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