Bank of America told thousands of its cardholders in recent weeks -- even those with good payment histories -- that they faced a rate hike from 9% to as high as 28% if they didn't pay off their balances at the old rate and stop using their cards. The bank, the largest credit card issuer, since its 2006 acquisition of MBNA, says it's all part of its "periodic" review of customer credit risk.
Consumer advocates cried foul. It's one thing for card companies to raise rates on customers who are behind in their payments or whose credit scores decline greatly, but quite another for on-time customers with no apparent black marks against them to be put in the higher-rate camp.
Bank of America gives card holders the chance to opt out of the higher rate by paying the account off, but such a request must be made in writing. "Consumers need to be aware of what is going on," says Curtis Arnold, founder of cardratings.com.
Whoa. Just a few years ago, card companies were stumbling over each other to woo new accounts, offering all sorts of incentives, like zero-interest periods and lavish rewards programs, to get people to sign up.
Then again, so were mortgage brokers.
Fierce competition in the credit card business and a wave of huge mergers concentrated the industry in the hands of a few major players: Citigroup, JPMorgan Chase, Bank of America, Capital One Financial and American Express.
Discover is also in the mix, spun off from Morgan Stanley last July. These survivors are reverting back to business models that include healthier profit margins--from the difference between what it costs them to borrow funds and what they charge for lending to consumers.
Smaller banks are no different. Some of the worst-offending cards are those targeted to borrowers with weak credit, the most vulnerable group. The New Millennium card, issued by New Millennium Bank of New Brunswick, N.J., is a secured card with a $59 annual fee, higher than is typical. Adding up the other costs to open an account, cardholders have to fork over $140 just to have access to money they put on deposit with the bank to back their spending on the card. It's basically like paying money for access to your money.
Millennium card also has no grace period, meaning a 19.5% interest rate on charges kicks in as soon as a charge is made. "That's unheard of," Arnold says. The account is secured with the borrower's own money. "There's no risk for the issuer."
Chris Van der Stad, president of New Millennium Bank, says the card offers a "good value" and a chance for borrowers to rehabilitate their credit ratings by paying on time and being responsible. As for the lack of a grace period, he says, "It's very expensive to process a low-balance card. That's why we have no grace period."
Unsecured cards can be just as unattractive. HSBC markets the American Dream card, which, for a 14.99% annual percentage rate, offers cardholders the chance to enter a cash lottery for every purchase. This links two favorite American hobbies: shopping and gambling. But consumer advocates find the link "disturbing," Arnold says.
A spokeswoman for HSBC said, "The American Dream Card is but one of many credit card products HSBC offers. Consumers should choose a card that meets their individual needs."