When Paying Your Bill on Time Isn't Enough

Dec. 15, 2008— -- Tommy Newsom believed he had done everything right.

Each month he paid his Bank of America credit card bill on time. The balance was relatively high -- about $5,000 -- but he paid at least the minimum due. Then earlier this year, he received a letter from his credit card company.

"They were going to double the interest rate on my credit card, and that upset me," he said. "Because there didn't seem to be, in my mind, a legitimate reason for doing that." Newsom's interest rate went from 14 percent to 28 percent, which increased the monthly minimum payments.

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"It makes a difference, $40 or $50 more," he said. "We watch what we do closer than we had. We live paycheck to paycheck."

Newsom is the sole breadwinner for his wife and grandson, having worked 47 years at the same private electricity company outside Dallas. But there were unexpected expenses that put his credit card to use more than he would have liked.

"In a two-year time frame we went through five operations in my family, and obviously I had a lot of medical bills. And what free money I had went into medical payments and some of the things I might not necessarily charge, I did charge," Newsom said, "and ran up the balance higher than I would have liked. Because I was just trying to pay off the medical balances and had to use the credit card quite a bit."

Newsom called Bank of America looking for answers.

"Essentially, what they finally told me was the rules allow them to do it, so they were going to," he said. "Period."

Newsom was given the chance to "opt out" or close the account, but at the time he was not in a position to do so.

"It was tied to my overdraft privileges at the time and to do so, I would have lost those privileges and would have had to go to another bank," he said.

The increase in the interest rate meant he was able to pay off only the minimum amount each month. He has not been able to lower the original balance. In the last 10 months, he's paid about $1,600. But the balance remains near $5,000.

"You feel like you are at the bottom of a bottomless pit, and you are trying to crawl your way out of it, but there's a long way to go," he said.

Bank of America would not comment directly on Newsom's case but sent "Nightline" a statement that reads, in part: "We do periodically review the credit risk for each account and may reprice individual accounts based on that risk assessment. That review takes into account a customer's performance with us as well as external credit risk indicators."

Weakened Economy, Mounting Pressure

Newsom, like many credit card holders, is finding increased interest rates, lower credit limits and changing fees. Americans on average have $8,000 in debt and own seven or eight credit cards. The total amount of consumer debt is close to $1 trillion. This is coming at a time when the mortgage crisis and unemployment have pushed people to the financial edge.

"The economy has weakened. The mortgage crisis has weakened the economy," said Scott Talbott, a lobbyist with Financial Services Roundtable, which represents 100 of the nation's largest banks. "You see a lot more unemployment, so there is a lot more risk in lending now. And so credit card companies are responding to that risk by increasing rates for some Americans and decreasing lines of credit for others."

Ed Mierzwinski of U.S. PIRG, a Washington, D.C., consumer advocacy group, said credit card companies had been unfairly targeting its customers.

"The last few months, banks have been tightening credit, tightening the screws on customers," he said. "They've started using unfair practices -- hair-trigger late fees, charging late fees when you were just one day or one hour late. In addition, the worst practice that people hate is they are raising your interest rate to a penalty interest for no reason at all."

But Talbott said Americans have been relying far too heavily on their credit cards.

"Credit cards have really become a staple for most Americans, and for some, they've become a lifeline," Talbott said, adding that credit cards were meant for emergencies, but more Americans have started using them for day-to-day expenses. "The problem is that credit cards are really designed for short-term financing. They are not designed for long-term borrowing. And what more Americans are doing is using credit cards for long-term financing."

Ann Lee retired to Florida and started a small travel agency. This month her bank -- Chase -- cut off one of her credit cards, eliminating a $15,000 line of credit.

"We are always working about 18 months in advance, and I need a cash flow and I use my personal credit cards to handle my cash flow," she said. "It's easier than a small-business loan for me."

Lee said that in her travel business, she had to place deposits to hold cruise ship slots and hotel rooms, and had to guarantee those deposits with a credit card. So, she said, she maintains high balances on the three cards she uses for her company. But, she said, in 45 years she had never paid her bill late.

She had the credit scores to back that up. But this fall, she ran over the limit on one of her credit cards -- not the one that was canceled.

'David Against Goliath'

The card that was canceled was a backup card that had a zero balance. Lee said that's part of the game the banks play. And she's not a typical credit card holder.

Before retiring, she worked for GMAC -- the financing arm of General Motors -- for 34 years, helping people obtain car loans.

"It's David against Goliath," she said. "The bank card companies, they are writing their own rules. And we have to live by them or take our business elsewhere. And I would say the majority of the people, they are stuck. It's kind of a conundrum. Where does it end?"

Though Lee said she didn't need that card, she was still angry. She said she wrote a letter to the CEO of Chase and got a phone call in reply from the company.

She said the company offered to reinstate the card but only after doing another credit check.

When contacted by "Nightline," Chase would not comment on a specific customer's case but issued this statement: "We constantly evaluate the cost of our business, including the risks and funding associated with credit card loans. When necessary, we make changes to credit lines, pricing or terms based on the costs to us of making loans, including borrower risk and market conditions. We are working hard to provide consumers impacted by these changes with alternatives."

"It's kind of at a tipping point, and if enough people feel, stand up and say enough is enough something will be done about it," Lee said.

And people are speaking up. The Federal Reserve proposed changes to credit card rules this past spring and received more than 62,000 comments on its Web site from the public -- the most ever on any issue.

This week the Federal Reserve will vote to approve sweeping changes that could help people like Tommy Newsom, who has found a better rate elsewhere and is in the process of leaving Bank of America.

"The most important thing the Fed will do is say there will be no more retroactive interest rate hikes unless a consumer has been at least 30 days late," Mierzwinski said.

Other changes include requiring companies to allow sufficient time to make payments, and reducing or eliminating some fees.

For now, the House has passed a bill with a credit card holders' bill of rights, but the Senate has not.

The banks say self-regulation has already eliminated some credit card practices that were considered abusive, but increased regulation could lead to further reductions in the availability of credit.

"It will reduce some fees, but it will also provide a better understanding, a clearer understanding between the consumer as well as the credit card lender so you avoid those gotcha moments going forward," Talbott said.

Talbott adds that banks have already taken steps to eliminate some credit card practices that were considered abusive but warns that increased regulation could lead to further reductions in the availability of credit.

But consumer advocates want even more protection. In Washington, the House has passed a bill with a credit cardholders' bill of rights, but the Senate has not.

"If the Fed does this, that's a major step," Mierzwinski said. "We're hoping Congress will then adopt the rule as a law because the law is more permanent."