Cracking Down on Surprise Interest Rate Hikes

Dec. 4, 2007 — -- Today a Senate committee questioned why some credit card customers who pay their bills on time, and follow all the rules, still face huge hikes in their interest rates.

"If you shop with a credit card as most Americans do," said Sen. Carl Levin, D-Mich., "dangers lurk … that few consumers realize could damage their financial future."

With the holiday shopping season now in full swing, find out whether you could be at risk, and what you can do to protect yourself.

Marjorie Hancock, of Massachusetts, says she's always paid her credit card bills on time. But recently her interest rate on one card jumped from 19 percent to 27 percent.

"I've never been late on a payment. I've always paid at least the minimum if not more on all the credit cards," Hancock told "Good Morning America."

So what happened? Bank of America, Marjorie's credit card company, sometimes raises interest rates on customers whose overall credit scores drop, even though their payment record with the company may be spotless.

"I don't know how that can be legal, but I guess it is," she said.

Sen. Claire McCaskill, D-Mo., admonished industry representatives for making money off cardholders who pay their bill on time or spend near their credit limit.

"The behavior you encourage is the behavior you use to raise interest rates," she said at Tuesday's hearing.

Larry Di Rita, a spokesman for Bank of America, defended the practice as helpful for giving the opportunity of credit to more consumers.

"That kind of risk-based pricing is what allows us to extend credit to an awful lot of people that might otherwise not be able to get credit," said Di Rita.

The American Bankers Association says most credit card companies have gotten away from the controversial practice, even though they believe it's fair.

"Riskier borrowers pay more for credit, much as riskier drivers pay more for car insurance. And over time your credit profile changes and some people become more risky and so they pay more for credit," explained Nessa Feddis from the American Bankers' Association.