Credit card companies use a host of tools to increase rates even on responsible borrowers who pay their bills on time, said Senator Carl Levin.
The companies use mathematical models and an array of outside data to regularly re-evaluate a cardholder’s creditworthiness and increase a cardholder’s interest rate, often by three times or more, even when the consumer has no history of late payments, Levin, chairman of the Senate Permanent Subcommittee on Investigations, said in a briefing with reporters.
The practice, known as repricing, “amounts to gouging,” said the Michigan Democrat, whose subcommittee is holding hearing tomorrow on the industry practice. “A whole lot of responsible cardholders, working people, are being squeezed,” Levin said.
The hearing is part of an investigation by Levin and Senator Norm Coleman of Minnesota, the panel’s top Republican, into credit card practices. Levin released details of the panel’s findings in a briefing with reporters today.
Executives from three of the nation’s largest credit-card companies — Discover Financial Services, Bank of America Corp., and Capital One Financial Corp. — are scheduled to testify. Lawmakers will focus on the industry’s practice of raising interest rates on cardholders who pay their bills on time and otherwise comply with card policies.
Risk of Default Many companies, including Discover and Bank of America, use models that rely in part on reports from Fair Isaac Corp., a Minneapolis, Minnesota, software maker that supplies credit scores used by 90 percent of the world’s banks. That FICO score is used by lenders to predict a borrower’s risk of default.
When a borrower’s score falls for whatever reason, it can cause the credit card company to automatically raise interest rates even on customers who have never missed a payment.
Card companies can’t always explain why their mathematical models lead to rate repricing for some cardholders and not others, Levin said.
Bank of America spokesman Larry DiRita said such risk- pricing is fundamental to the industry and has allowed more people to own credit cards.
“It’s led to the democratization of credit,” DiRita said. The practice is relatively rare, and customers are allowed to opt out of their credit card agreements if they don’t want to pay the higher rates, he said.
Passing on Costs Other card companies, including Capital One, raise interest rates when the cost of borrowing goes up. When interest rates rose this year, the company passed on the higher cost of borrowing, including raising the interest on existing unpaid balances.
Levin’s legislation would limit a credit card company’s ability to reset interest rates. Levin said he expects the Senate to act on the issue next year.
Senator Barack Obama of Illinois, a candidate for the 2008 Democratic presidential nomination, said that, as president, he would crack down on predatory credit card lending by banning interest rate changes on existing balances and preventing card companies from charging interest on fees.
In the House, Representative Carolyn Maloney, a New York Democrat, also is working on a measure to restrict the ability of credit card companies to change interest rates and impose fees.
Some companies are reacting to political pressure on the issue. This summer, Capital One said it would give cardholders 45 days notice of a repricing, up from 30 days.
JPMorgan Chase & Co. and Citigroup Inc., two of the three largest U.S. credit-card companies, said in May that they would change their repricing policies. Beginning in March, Citigroup said it will stop raising interest rates on customers who miss payments to other creditors. JPMorgan said it will discontinue charging penalties on consumers who exceed their credit limit.
