Too Good to Be True?
It was the low teaser rate that initially caught Carlos Duarte's eye two years ago. At 3.9 percent, the offer for a Chase MasterCard seemed too good to pass up. Duarte, a real-estate developer who splits his time between Connecticut and Brazil, eagerly opened an account. But the honeymoon came to an abrupt end last year when his rate suddenly jumped to 28 percent. Duarte was stunned and confused. He had always paid his bills on time and maintained a high credit rating.
He learned later that Chase considered him a high-risk customer because of large balances on each of his three credit cards. "The bottom line is that I never missed a payment," he says. "I just don't understand why a company sends me a teaser deal for a card, and after two years, I'm being penalized."
Duarte is just one of many cardholders caught in a tug of war with credit card companies. As issuers battle for new customers by dropping interest rates and advertising lucrative reward programs, many cardholders say things can quickly change for the worse after signing on the dotted line. "This is probably the worst period of time for consumers," says Robert Manning, author of Credit Card Nation . He and other consumer advocates worry that lenders have been squeezing cardholders too tightly by imposing late fees and penalties, often with little warning or explanation.
According to a survey by Consumer Action, the average late fee more than doubled from $13 to $27.46 between 1995 and 2005. Cardholders and consumer advocates are also fuming over the practice of "universal default," where some lenders raise customers' rates because of missed payments on utility or cable bills or other credit cards.
Changes afoot. Under fire, some credit card companies are now changing their rules. Citibank, for example, will provide customers with advance warning if their rates are to be increased because of a delinquency with another creditor. Cardholders can opt out of the increased rates and use their card under existing terms until the card expires. Chase this year eliminated its universal default policy.
Changes to minimum payments are also in the works. The Office of the Comptroller of the Currency is requiring that monthly minimum payments cover not only fees and interest each month but also some portion of the principal. The minimum payment used to be around 2 percent of the balance, which for some customers would only cover interest or fees. At Bank of America, cardholders must now pay a $10 minimum on top of any fees and finance charges.
And the Federal Reserve is reviewing how credit card companies disclose financial information to consumers. Currently, issuers must disclose the cost of credit as a dollar amount and as an annual percentage rate. The Fed is considering provisions that will streamline the information consumers receive and make it more accessible.
But critics worry that some changes, if adopted too quickly, may just confuse customers or push them into financial trouble, while also giving credit companies another legal shield to stand behind. Says Travis Plunkett, legislative director of the Consumer Federation of America: "Merely giving consumers more information will not deal with many of these problems."
PAPER TRAIL
Annual credit card mail offers (in billions)
1999 2.54
2004 5.23
Source: Synovate
Chart by Rod Little-- USN&WR
This story appears in the August 8, 2005 print edition of U.S. News & World Report.
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