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Card companies jacking up rates

Blame the economy, and some proposed regs that would limit hikes going forward

by Mina Kimes, reporter
Last Updated: September 26, 2008: 12:12 PM ET

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More card issuers are hiking rates, blaming "market conditions."

NEW YORK (Fortune) -- When John Dykstra got his September credit card bill from Advanta, a small-business card issuer, he was shocked: Dykstra says he has a good credit score and has never missed a payment, but his interest rate had jumped from 7.99% to 26%.

He was even more shocked by the explanation: A brochure in the mail told him he needed to be aware of the "continually changing business environment."

He's not alone. Card issuers from Bank of America to Capital One are using the economic crisis as a reason to raise rates. According to Consumer Action's 2008 survey of card companies, Bank of America, Citi, and Capital One have recently said that "market conditions" could cause them to increase APR's.

"It's becoming a more common practice," says Ben Woolsey, director of consumer research and marketing at creditcards.com, a comparison site for card offers. "It's a broad, nebulous provision."

Betty Riess, a spokesperson for Bank of America, says the bank's fine-print provision for "market conditions" doesn't refer to the economy at large, but notes that "the current situation might cause us to take a more aggressive look at accounts."

Credit card companies often boost rates for reasons other than delinquency; the so-called universal default provision lets them change terms at any time based on customers' usage of other lines of credit. But when the Fed asked lenders in its most recent quarterly survey why they would tighten standards, 98% of responders blamed a less favorable economic outlook.

"They're saying, the economy is getting bad, and our earnings are under pressure--so we can change your account," says Woolsey.

The survey revealed that 37% of banks have increased rates, compared to 24% in April and 10% in January. They may be raising rates to compensate for losses. Advanta saw an 83% decrease in earnings in its second quarter, due in large to provisions for credit charge-offs. Capital One's profits dropped 40% and American Express saw a 38% decrease. And while Bank of America's 41% dip in earnings beat estimates, the company incurred $2.75 billion in credit card losses 31% more than last year.

Cardholders revolt

The recent round of hikes is fomenting a cardholder revolt. Testimonies about opaque rate hikes are piling up on ripoffreports.com and consumeraffairs.com, and some 56,000 consumers posted comments on the Fed's website, responding to potential regulations that would limit issuers' abilities to raise rates record feedback for a Fed proposal.

Issued in May, the Fed's proposal would prohibit issuers from increasing rates on preexisting balances and severely limit their ability to bump rates in the first place. The proposition drew support from consumer groups and swift criticism from card companies, which said the rules would punish those with good credit.

A similar initiative, called the Credit Cardholders' Bill of Rights, was passed in the House on Tuesday. Many predict that the bill will languish in the Senate, but Linda Sherry, national priorities director for Consumer Action, says Tuesday's passage will likely push the Fed regulation along.

"It was the will of Congress, and the Fed can draw comfort from that," she says.

The timing has caused some analysts to ask if the recent slew of rate bumps isn't a response to the economic slowdown but rather a preemptive strike. "It's likely that the Fed will produce a resolution by the end of the year," says Michael Taiano, a financial services analyst at Sandler O'Neill. "The companies are trying to move in front of that."

Sherry agrees. "With the companies facing limits of being able to raise your rates, it would be surprising if they didn't increase them now," she says.

If reform is in the cards, consumers may see spikes in their statements from now until December whether or not "market conditions" change.  To top of page

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