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.

It Could Happen to You

"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.

Controversial, but Legal

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.

Senate Hearings

In the past senators have criticized hidden credit card fees, but this time they're going after these surprise changes in interest rates.

The hearing also discussed the practice of retroactive rate increases applied to existing debts instead of just to new purchases, and raising rates on closed accounts that consumers are still paying.

Janet Hard told the Senate panel Tuesday that the interest rate on her Discover card jumped to 24 percent without her knowledge, despite her clean payment history and reined-in spending that did not exceed the available balance on the account.

Hard said she contacted Discover's customer service department, and a representative told her the rate went up because of available balances from inactive accounts she also held placed her at risk of defaulting on the account she had with Discover.

"When I look at the money that we've paid to Discover during just the last two years, I feel sick," Hard said.

"Of the $5,618 made in payments to Discover, $3,478 and 39 cents went to interest."

"I think that's very very wrong, to unilaterally change those interest rates, and to make it retroactive, those increases in the interest rate, just adds insult to injury," said Sen. Carl Levin, D. Mich.

Fight Back

Here's what "GMA" consumer correspondent Elisabeth Leamy recommends to protect yourself.

Keep only one to two cards. The more you have, the more rules and fees you have to look for.

Consider automatic payments. Setting up automatic monthly payments that cover at least your minimum could save you from inadvertently putting yourself at risk.

Ask for a lower interest rate. Budget so that you're never late and then try calling your credit company. Suggest that you'll take your reliable business elsewhere unless they lower your interest rate. You would be amazed how often this works.