Non-Profit Org. U.S. Postage PAID CONSUMER San Francisco, CA Permit # 10402 ACTION NEWS Change Service Requested Summer 2005 • www.consumer-action.org A publication of San Francisco Consumer Action 2005 Credit Card Survey credit card bill late—even once. Late payments are not the only reason issuers Card companies use common ‘risk factors’ impose higher penalty interest rates. Going over your credit limit or bounc- ing a payment check can trigger a rate to impose unfair rate hikes, finds CA increase, too, in addition to hefty fees. The average penalty rate this year is redit card penalty interest rates the way customers handle other credit credit, the rate might be adjusted 24.23%, up from the 2004 average of and universal default rate hikes, accounts. This year, 44.68% of banks downward—although not always to the 21.91%. This increase is probably at- Coften cited as a way for card said they have universal default poli- original rate. tributable to the fact that most penalty companies to manage risk, top the list cies—a slight increase from last year’s Advance notice of default or penalty rates vary with the Prime Rate, and from of unfair credit card practices. In its survey. According to customer service rate increases is not required by law. last year’s survey to this year’s the Prime new credit card study, Consumer Action representatives, the following circum- In many cases, the first time consum- Rate increased two percentage points (CA) uncovered the top reasons that stances, in descending order of impor- ers learn of a rate increase is when they (from 4% to 6%). lead banks to impose penalty rates. CA’s tance, can trigger a universal default rate open their statements. This year, several Late payments result in higher penalty findings show that anyone—not just hike: large banks such as Citibank, Chase rates with 78.7% of the issuers—a drop people in financial difficulties—could be • Credit score gets worse: 90.48% and MBNA announced their intentions from 85% of the issuers last year. Of the subjected to a much higher rate. • Paying mortgage, car loan or other to give cardholders advance notice of issuers who assess penalty rates, 43.2% creditor late: 85.71% such interest rate increases and allow said a penalty rate could be triggered Universal default • Going over credit limit: 57.14% cardholders to “opt out” of paying them. by just one late payment. Last year just Universal default rate hikes are im- • Bouncing a payment check: 52.38% However, when consumers decline to 31% assessed a higher rate after one late posed by credit card companies based on • Too much debt: 42.86% accept the change, they lose the use of payment. • Too much available credit: the card. More than half (57.45%) of the banks 33.33% “It’s nice to get a warning,” said CA’s with penalty rates were willing to reduce • Getting a new credit card: Linda Sherry, who coordinated the sur- the rate if cardholders improved the way Survey at a glance 33.33% vey, “but for many folks, there is nothing they handled their accounts. Six more is- • Inquiring about a car loan or they can do with the heads up. They suers said it might be possible to reduce Issuers: 47 mortgage: 23.81% can’t afford to pay off the balance, and the rate. In most cases this means an Cards: 146 CA found default rates as high as to transfer the balance to another credit on-time payment record of six months or Average APR: 12.61% 35% (Merrick Bank). Runners-up card they need a clean credit record.” more and then cardholders must ask for for the highest default rates are Sherry noted that people who reject a rate review. Variable Cards: 118 Citibank, Bank of America and the change of terms lose the use of their Average Variable APR: 12.96% Providian at 29.99%. The low- card, immediately or at the end of the More findings Average Variable Rate Range: 6.00% est default rate is 12% (Arkansas expiration period, depending on the CA’s yearly snapshot of credit card (Ranier Pacific, Town Bank and Wells National Bank). bank. “The opt-out protects you from industry practices examines 146 credit Fargo) to 24.94% (Merrick Bank) Eleven of the 21 banks with uni- the higher interest rate, but it’s unfair in cards from 47 banks. Janice Kohn, versal default policies are willing to any case to raise the interest rate on an Joseph Ridout and Joe Caldarola con- Fixed Rate Cards: 28 reduce the higher rates if cardhold- existing balance.” ducted the survey between April 1 and Average Fixed APR: 11.15% ers’ credit histories improve. Three June 21, 2005. Fixed Interest Rate Range: 6.5% (Pulaski more banks said it was “possible.” Penalty rates The average interest rate for all cards Bank) to 16.50% (Commerce Bank) Twelve banks out of these 14 said Penalty rates are much higher inter- that after six months of improved est rates triggered when you pay your See “Survey findings” on page 2 several real-life consumer experiences interest rate can use their cards at the received by CA’s complaint hotline. existing rate until the expiration date. Consumer Action speaks to Despite some legislative attempts to Upon the card’s expiration, the account reform credit card disclosures, consum- would be closed and no new charges ers are often shortchanged in receiving would be allowed. The cardholder Senate Banking Committee key information on credit card rates and would be allowed to pay off any remain- terms. “Our experience is that obtaining ing balance at the existing interest rate. Unfair credit card practices explored accurate information from credit card To many consumer advocates, Citi- companies is frequently exasperating group’s announcement is just a small By Jennifer Daw Holloway decisions, said Committee Chair Sen. and difficult, and the answers are often step in protecting consumers. Richard Shelby (R-AL). The topic was lacking in key details about conditions, Plunkett, CFA’s legislative director, onsumer Action’s Linda Sherry of pressing importance, “due to the especially those related to fees and other said Citigroup’s new policy was more appeared before the Senate unprecedented size and scope of this costs, and to the circumstances that trig- responsible but he noted that disclosure CBanking Committee on May 17, industry,” said Shelby, noting that 6,000 ger universal default rules,” Sherry told of universal default rate increases is not along with other consumer advocates financial institutions issue over 640 mil- the committee. the same as stopping this inequitable and credit card company executives who lion credit cards to 145 million Ameri- This practice “tops the list of unfair practice altogether. He called universal had been invited to testify on credit card cans. practices,” said Sherry, because custom- default policies “fundamentally unfair. industry practices. Sherry joined Travis ers are given little choice about the rate One late payment can result in signifi- Plunkett of the Consumer Federation of Practices questioned or fee hikes. In 2004, CA found penalty cant increases in interest rates although America (CFA), Edmund Mierzwinski of “Universal default” was a hot topic at interest rates as high as 29.99% and this there is little to no evidence that a single the U.S. Public Interest Research Group the hearing. Universal default rate hikes year has seen one bank charging a pen- late payment to one creditor increases and Dr. Robert Manning, author of the are imposed by credit card companies alty rate of 35%. the likelihood of default to all creditors.” book “Credit Card Nation,” in repre- based on the way customers handle During the hearing, Anthony Jenkins “It’s the only industry in the world to senting the consumer interest. other credit accounts. Many credit card of Citigroup announced that it would no re-price something you already paid for,” The hearing was called to give the companies use credit reports to track longer penalize customers without giv- Sherry told The Washington Post after the committee an opportunity to determine their customers’ credit. When custom- ing them prior notice and allowing them hearing. whether the credit industry is providing ers’ credit scores drop, the company of- to reject any changes in terms. However, The hearing highlighted the funda- consumers with the information neces- ten doubles or triples their interest rates. Citigroup customers who exercise their mental differences between consumer sary to make responsible credit-related During CA’s testimony, Sherry cited new option to opt out of the higher See “Senate hearing” on page 9 Credit limits Consumer Action Survey findings Twenty-five (53%) Late fees on surveyed cards surveyed banks said www.consumer-action.org Continued from 2 that they reduce card- Cards Late Fee holders’ credit limits Consumer Action is a non-profit is 12.61%, ranging from 6% (Ranier 21 Tiered fee, with an average of: $29 under certain circum- 501(c)(3) advocacy and education Pacific, Town Bank and Wells Fargo) stances, usually for the organization founded in 1971. CA to 24.94% (Merrick Bank). The 2005 17 Tiered fee, with an average of: $27.67 following reasons: publishes surveys and distributes Credit Card Survey found that 118 of • Late payments, 14 $29 multilingual educational materials in surveyed cards have variable rates, with going over limit or ac- printed form and on the Internet. an average interest rate of 12.96%, and 14 Tiered fee, with an average of: $27 count in collection. 28 cards have fixed rates, with an aver- • Poor credit report 14 Tiered fee, with an average of: $26.33 age rate of 11.15%.