Changing credit card terms squeeze consumers

— -- Aggressive rate increases on credit cards are threatening to push struggling consumers into financial ruin, accelerating home foreclosures and the nation's descent into recession.

The growing problem is reflected in cases such as that of Dennis Spaulding, of Corona, Calif. He bought two last-minute plane tickets for his father's funeral in 2006, a purchase that increased the amount of credit he was using and made him appear riskier to banks. The result: Banks raised the interest rates on four of his credit cards — to 24% and higher — doubling his monthly payments to about $2,000.

That led to a financial spiral that has put him on the verge of losing his home and filing for bankruptcy. "I see no light at the end of the tunnel," says Spaulding, a cabinet designer.

Valerie Walker, of Middletown, Del., tells a similar story: Increasingly high credit card rates mean she's scrambling to pay other debt obligations. She worries about falling behind on bills for her mortgage and business, Subway sandwich franchises.

Across the nation, a growing number of consumers and financial experts are complaining that sudden credit card limit reductions and sharp interest rate increases are triggering a domino effect that makes it harder for consumers to juggle bills, stay in homes and avoid going broke. No official data are available on how many people are being pushed into financial distress by credit cards rather than mortgages. But credit counselors, bankruptcy lawyers and legislators say banks increasingly are pummeling consumers for making the smallest payment error — or making no error at all.

The shift comes as regulators and legislators have spent the last year pointing to toxic mortgages and overextended home buyers as the culprits behind the financial crisis. Credit cards, by encouraging a society of spenders rather than savers, have played a significant role in loading up consumers with unaffordable debt whose rates and terms can change at any time.

"If people get charged 30% interest, that is going to push them over the edge," says Sen. Carl Levin, D-Mich., who has co-sponsored a bill to crack down on credit card fees and rates.

The Federal Reserve is expected to release a rule shortly aimed at cracking down on hair-trigger jumps in card rates and fees, but consumer advocates worry it won't go far enough in reforming credit card practices.

USA TODAY, in previous articles in its "Credit Trap" series, has reported that during the housing boom, banks sharply raised card limits in part because of a surge in home equity, then guided borrowers to use mortgages to pay off card balances. The series also found that banks' practice of packaging and selling credit card debt to Wall Street has given them a powerful incentive to raise card rates and fees.

Now, USA TODAY's interviews with credit counselors, bankruptcy lawyers and other financial experts show that as debt-saddled consumers struggle to stay afloat, banks are aggressively raising rates and fees — often stripping consumers of what little disposable income they have left and threatening to become another drag on the economy. Consumer spending makes up more than two-thirds of U.S. economic activity.

"This is the only credit people have available," says Robert Manning, author of Credit Card Nation: The Consequences of America's Addiction to Credit. "You raise their monthly payments … this is going to drive people straight into bankruptcy."