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Some credit card companies find window of opportunity

By Staff | Aug 8, 2009

Within a period of two months, Roger Butts’ interest rate on his Bank of America Visa Card increased from 9 percent to 29 percent, a tactic credit card companies are reportedly employing nationwide to raise additional revenue before reform takes affect next year.
Butts, a Cape Coral resident, said his credit card always had an annual percentage rate (APR) of 9 percent until he received a letter a month ago stating it was increasing to 14.9 percent.
“They said that was the annual adjustment, and it was not through anything we have done wrong,” he said.
Posted on the letter was a phone number to call if Butts wished to decline the rate increase. It had a recording asking whether or not he wanted to accept the increase, and stated that if he didn’t say ‘yes’ he could never use the card again at 9 percent APR.
“If you wanted to keep the old rate then you would have to keep it until it’s completely paid off,” he said. “It’s not that you can’t use it, but the second you do it will go to 14.9 percent.”
Butts’ decision was to stop using the card and make regular payments until Saturday when he received another notice that his last payment was late and as a result the APR was about to jump even higher to 29 percent.
“So within two months we’ve gone from 9 percent to 29 percent,” he said. “They did say if you continue and didn’t have another late payment for six months they would bring it back down to 14.9 percent.”
Thousands of credit card holders across the country have also experienced seemingly arbitrary hikes in rates.
The Better Business Bureau released a statement in the beginning of May warning Florida consumers that “citing economic conditions, American Express, Bank of America, Citibank, Capital One, and HSBC are raising rates on potentially millions of credit card holders.”
According to Americans for Fairness in Lending, six companies, including Bank of America, make up 90 percent of all credit debt.
Not only have these creditors lost a large share of their revenue during last year’s economic crash, but many are deciding to raise rates as a way to generate as much as possible before credit card reform goes into effect in February 2010.
The reform affects many current lending practices, including a ban on increasing existing balances, a requirement to provide a 45-day notice of any rate increases, the prohibition of fees for going over a credit limit, an imposition of reasonable “penalty” fees, and a rule against anyone under the age of 21 getting a credit card without a co-signer.
College students between the age of 18-21 are especially susceptible to credit card debt and the average undergraduate senior leaves school with $4,100 worth of debt. One stipulation of the reform is to stop credit card companies from aggressively marketing cards to college students, who often use the cards for financial aid, textbooks, groceries or other items.
While the reform is a major step to protect consumers, after it was signed into law by President Barack Obama in May, it doesn’t restrict rate increases.
Credit card charges account for over $900 million worth of debt in the United States, an amount that has presumably ballooned as more people use their cards to offset money problems in the troubled economy. In 2007 the average credit card debt per cardholder was $7,430, and the average credit card debt for households was $17,103, according to the Americans for Fairness in Lending.
Jaron Jones, a credit counselor with Direct Financial Solutions in Cape Coral, said many of his clients are concerned about their credit card debt. For the most part he works with people who have credit debt worth $5,000.
“They have mentioned about interest rates going up,” said Jones. “They (creditors) are going to try to increase their rates as often as they can, whenever they can.”
Bankruptcy is one option for people overwhelmed by credit card debt, although filing for Chapter 7 or 11 doesn’t always leave a consumer completely debt free. In many instances they are still responsible for paying a portion of their old debt.
Jones said he tries to direct people away from bankruptcy and instead suggest they try to sell items or take on extra jobs to get rid of the debt.
Other credit counselors work with consumers to help consolidate their debt into one monthly payment or negotiate a debt settlement where a consumer is allowed to pay less to satisfy their balance.
Tips for consumers who have experienced increases in their interest rates:

n Contact your credit card company: Anyone who believes their rate was increased by mistake should contact their credit card company. There is evidence that credit card companies might be willing to negotiate rates to keep cardholders as customers, so it doesn’t hurt to contact the company and discuss options.

n Pay off the account: If the cardholder doesn’t want to accept the new rate, they can choose to keep their current rate and pay off their outstanding balance, as long as they don’t make any new purchases. If any new purchases are made, the higher rate will be enforced.

n Find a better deal elsewhere: Other credit card companies might be offering better deals, such as low introductory rates that will give the holder a less expensive way to pay down debt.

n Manage credit responsibly: According to banks, most rate hikes affect people who maintain balances on their card or have rates that are too low for the market. Therefore, one of the best ways to avoid a sudden interest rate hike is to use credit cards responsibly which includes paying bills on time and not carrying a balance.

n Keeping an eye on new regulation: Try to follow the newest laws and regulations passed on the credit card industry.

Source: Better Business Bureau