Lawmakers grill credit card execs

NEW YORK (CNNMoney.com) -- For the second time this year, irate lawmakers on Tuesday took credit card industry executives to task over what they claim are "unfair" practices, such as increasing interest rates on debt even when customers make payments on time or when their credit scores fluctuate.

"If (these) credit card dangers lurk, it could damage the financial future of Americans," Sen. Carl Levin, D-Mich., chairman of a Senate Homeland Security and Governmental Affairs subcommittee, said during a hearing to discuss industry practices.

"These scores are the primary driver of interest rate increases for millions of Americans," said Levin. "But if a person meets the monthly debt obligations on time, it's unfair to raise rates. Equally offensive is the practice of issuing an interest rate increase retroactively to an existing rate."

With Americans weighed down by an average credit card debt of $2,200 per household, practices of the very profitable industry have been ripe for scrutiny by the Democrat-controlled Congress. They have also grabbed the attention of the Federal Reserve, which plans to require credit-card issuers to give customers at least 45 days' notice before raising interest rates and to provide clearer information on fees.

Levin's subcommittee, which has been investigating the industry on issues such as grace periods, interest rates and excessive fees, first released a report during a hearing in March.

In May, Levin introduced the Stop Unfair Practices in Credit Cards Act. If passed, the law would stop credit card issuers from charging interest rates on debt that is paid on time and require that interest rate hikes apply only to future credit card debt and not debt already incurred.

However, credit card companies say such a law would have dire consequences on all consumers by making credit more expensive and less easily available."

"Credit cards are one of the most popular forms of payment in America," Ryan Schneider, president of card services with Capital One Financial Services (Charts, Fortune 500), told the panel. "Flexible pricing is an essential tool for this open-ended, unsecured product that relies on payments that are neither consistent nor predictable."

Levin highlighted the case of Janet Hard, a Discover Card customer who testified about her experience at Tuesday's hearing.

"Janet pays her bills on time and has never exceeded her credit limit," Levin said. "In 2006, Discover Card raised her interest rate from 18 percent to 24 percent because her credit score had dropped but they didn't tell her why it had dropped."

With the higher rate, most of Hard's monthly payments went toward covering her finance charges instead of bringing down her principal debt.

"We paid our bills on time and never accrued a balance over our credit limit," said Hard, a registered nurse who is married with two children. "I thought the 24 percent rate was an error. But the company said they ran a spontaneous check that put us at a risk of defaulting on our payments. I feel sick. It's hard for me to get my mind around that."

Other lawmakers were equally harsh with their criticism.

"The debt in credit card obligations could become the next subprime disaster. It's time for Congress to act," Sen. Claire McCaskill, D-Mo., said during the hearing.

"Americans need clear language that explains to them why they are paying what they are paying. This could be done by the [credit card] companies," she said. "If they don't, then we will ultimately force it upon companies to become more consumer friendly."

Levin's scrutiny of the industry has had an impact. JPMorgan Chase (Charts, Fortune 500) recently announced that the company would eliminate so-called double-cycle billing - which eliminates the interest-free period of consumers who move from paying the full balance monthly to carrying a balance. Additionally, it will no longer raise rates based on credit scores.

For their part, industry executives from Discover Financial Services (Charts), Bank of America (Charts, Fortune 500) and Capital One told the subcommittee that incremental changes to their policies have to be balanced against the dynamics of the credit card business.

Capital One's Schneider said his company had instituted changes to its credit card policy, including warning cardholders before raising rates on their balances and allowing cardmembers to earn back their old rates.

"The onus is on us to improve. We applaud measures to avoid aggressive debt repricing, but imposing restrictions on all repricing could reduce credit availability and make debt much more expensive for all consumers," Schneider said.