Dec. 18, 2008 -- Melissa Wareham got a nasty surprise when she opened her credit card statement last month: Her bill was hundreds of dollars higher than she expected.
The culprit, she said, was her new, higher interest rate -- it jumped 10 percentage points to 27 percent.
Wareham, a human resources consultant, is paying off about $20,000 in credit card debt accumulated while she and her husband were both in graduate school. The interest rate spike shocked her, she said, because she always pays her bills on time.
"We have other accounts and so, now, I'm watching those really carefully to make sure that's not happening with those accounts," the 27-year-old Washington state woman said.
Relief is now on the way for Wareham and other Americans caught off guard by sudden spikes in credit card interest rates.
New rules announced today by the Federal Reserve, the Office of Thrift Supervision and the National Credit Union Administration, will include a restriction limiting when credit card companies may raise rates.
The restriction, industry watchers say, will allow credit card companies to raise rates on existing credit card balances only when the card holder is more than 30 days late, when he or she is receiving a promotional interest rate with a defined expiration date, or if the interest rate is tied to a specific market index, such as the London Interbank Offered Rate.
Under the restriction, card companies would still be able to raise interest rates on new charges.
Wareham is optimistic about the rule.
"I think that it would definitely help people to get out from under their large amounts of debt," she said.
Gerri Detwiler of Credit.com, a credit information Web site, also applauds the change.
"It just brings some sanity back to this market," she said.
But not everyone is cheering.
High Risk, Credit Reward?
Scott Talbott of the Financial Services Roundtable, the trade group that represents some of the country's biggest credit card companies, suggested that the rules change might ultimately result in fewer people qualifying for the credit they need.
He said it will hamper companies' efforts to perform "risk-based pricing" or, in other words, it'll make it harder for companies to compensate for the risk a borrower presents to them with higher (or lower) interest rates.
Through risk-based pricing, he said, companies can offer credit to people who otherwise wouldn't qualify for it. And when a borrower's risk profile changes -- if they're late on a payment or borrow over their limit, for instance -- the company can change the rate accordingly.
"If you limit banks' ability to charge the rate commensurate with risk profile of the borrower, then that borrower may not get the credit," Talbott said.
But, as of now, credit card companies are also able to raise interest rates for reasons that aren't directly related to the borrower. Thanks to the recession, card companies' own costs have increased because of higher bank borrowing costs overall, as well as a spike in the number of credit card holders defaulting on their loans.
Analysts have said that the card companies' flexibility in raising rates and taking other steps -- such as shrinking consumers' credit card limits or canceling inactive accounts -- are tools the companies can use to survive today's economic slump.
Talbott said that only a small percentage of consumers have seen their credit card interest rates rise to compensate for the card companies' increased costs, although he could not provide an exact number. Overall, he said, about 10 percent of the country's more than 20 million credit card holders have seen their rates increase this year.
Credit.com's Detwiler said the companies have been too quick to raise their rates. The increases, she added, are discouraging some consumers from paying off their loans.
"These high punitive interest rates are going to push more people into default," she said. "It's almost a vicious circle because people see their interest rate go up, they reach a point where they realize they can't pay that credit card bill off ... and at that point, they give up."
Here are some other rules announced today:
Credit card bills may be mailed or delivered no later than 21 days before a payment due date.
Changes in payment allocation: Borrowers who have different interest rates on different portions of their credit card balances may be able to pay off the portions with higher interest rates first.
New limits on fees attached to "subprime" credit cards given to borrowers with poor credit.
New restrictions on over-the-limit fees.