Credit Cards Rates Rise for Some With Poor Credit

Aug. 25, 2007 — -- Don't own a home or plan to buy one anytime soon? Well, listen up because the fallout from the country's mortgage problems could still affect you.

Several credit card companies in recent weeks have started to jack up rates for some customers, and other lenders are tightening standards for auto and personal loans.

Banks and lenders, for the most part, are not directly citing the national tightening of credit due to rising mortgage defaults. Most attribute the changes to generally tighter credit for corporations and individuals.

But still, lenders are taking a close look -- whether new or not -- at people's credit, and that is pushing costs higher for some consumers.

The credit cards tie their rates to those set by the Federal Reserve and factor in the number of delinquencies. Since neither of those have changed, neither have credit card rates, McBride said.

Greg McBride, senior financial analyst at Bankrate.com, said that credit card rates have been flat throughout the year. But while overall rates might be flat, it doesn't mean that they're not climbing for some.

"If you start falling behind on payments you're a sitting duck for a higher rate. That's a normal course of business," McBride said. "Unlike the mortgage business, where everybody just woke to the prospect of risk three weeks ago, credit card issuers live credit risk. Their debt is unsecured so they are constantly in this mode of monitoring risk."

McBride said the credit card business has long set different rates based on each individual's credit-worthiness. And while rates for consumers with good credit might not have changed, it is possible that the companies are shifting more people with less-than-perfect credit over to the more-expensive rates.

But nobody knows for sure.

"They keep that very close to the vest," McBride said.

A Routine Review?

No bank wants to be known for rising rates and fees on consumers.

Betty Riess, a spokeswoman for Bank of America, answered almost every question ABC News asked her about the bank's handling of its credit card customers and their rate with a variation of the same phrase: "We periodically evaluate individual accounts and make adjustments based on the individual merits and credit worthiness."

Riess said Bank of America has not changed rates and fees for all customers, emphasizing that decisions are made on "individual merits and credit worthiness" -- a phrase she used six times in a brief phone interview.

While the mortgage crunch may not directly affect credit card interest, it could have an affect on spending habits. Many consumers are using plastic for more purchases as they find it harder and harder to get home-equity loans and other lines of credit.

The Federal Reserve earlier this month released new data showing that Americans are turning to their credit cards more and more often.

Consumer credit rose in June by an annual rate of 6.5 percent, according to the Federal Reserve. The driving force behind that jump was credit card use.

The number of people getting accepted for credit is also dropping, a trend going back further than the recent fallout from the subprime lending market. Most Americans already have credit cards, so it becomes "tougher and tougher" to sign up new, credit-worthy customers, said Robert Hammer, chief executive of R.K. Hammer, a private investment banking firm that advises credit card companies.

"You have fewer and fewer people applying, except for those that perhaps need the credit," he said.

With a less-qualified applicant pool, rejection rates climb.

Hammer said the industry is averaging an acceptance rate today that is 12.5 percent lower than a year ago. But he doesn't attribute that decline to the current mortgage problems.

"Issuers are all tightening credit quality, and frankly have been for some time," Hammer said. "What we're seeing is what should be done."

Some card issuers tightened standards five years ago, some more recently, and just about everybody has done so within the last year or two.

"It's ongoing, every month, for every issuer, every year," Hammer said.

Card issuers are also taking another route: granting cards but for a significantly smaller lines of credit than before.

How to Choose the Best Card

When shopping around for credit cards, the Federal Reserve says one of the key things -- if not the key thing -- to look at is the card's annual percentage rate, or APR. This is the interest rate the the card carrier pays if he or she carries a balance, takes out a cash advance or transfers a balance from another card.

Cards often have several different APRs for different transactions. Learn what the rates are and what they mean. There can be one rate for purchases, another for cash advanced and yet another for balance transfers from other cards.

Some cards have tried APRs with rates that increase along with your balance. So an outstanding balance of $300 might come with a 16-percent interest rate while anything over $500 might be charged at 18 percent.

Other cards carry a penalty APR, meaning that if you fail to pay your bill within a certain number of days, your interest rate will go up.

There are also cards with introductory, or delayed APRs. These card have no interest or low interest at first, but then jump up to a new rate after a few months.

It's important to look out for minimum finance charges. Cards with these fees will charge you this minimum even if the calculated amount of your finance charge is less. For example, your finance charge may be calculated to be 35 cents -- but if the company's minimum finance charge is $1, you'll pay $1.

There are numerous other fees to be aware of. They include an annual fee, cash-advance fee (either a flat fee or a percentage of money borrowed), balance transfer fee, late-payment fee and an over-the-credit-limit fee.

Todd Cook, president of Debt.com, offers some additional tips. To improve credit, he said pay more than the minimum payments on your credit cards and pay off the cards and loans with the highest interest rate first -- not the ones with the highest balance.