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What to do when the bank raises your credit-card interest rate


NEW YORK -- When firefighter David Hunt, 47, of Meridian, Texas, checked his credit card bill last March, he couldn't believe his eyes. He had been paying 13.90 percent on unpaid balances, he says. Suddenly, his rate jumped to 24.96 percent.

The same thing happened to Tom O'Rourke, 41, an office services clerk in San Jose, Calif. His rate went to 24.65 percent, from 14.65 percent before.

Why the jump? Because their card issuer, Capitol One Financial in Falls Church, Va., decided that they had become higher credit risks. So the bank exercised its contractual right to charge them more.

Several lenders have adopted this idea -- perhaps even yours (check your credit agreement's fine print).

Typically, they raise the rate to customers who pay late or exceed their credit limit. At Capitol One, however, your rate can be raised even if you follow the rules and pay on time.

Twice a year, Capitol One runs its customers' credit histories through a scoring system. Your rate can jump if the bank concludes that your credit profile isn't as strong as it used to be. For example, you might have added another credit card or increased the debt that you carry on your other cards.

But if you ask why your rate went up, the bank responds with gobbledygook. Two of the reasons given by Capitol One to Hunt and O'Rourke: "presence of derogatory accounts" and (get this) "recently active or lack of bank, retail or finance accounts."

Liz McLean, the bank's spokeswoman, says she can't define a derogatory account and can't understand the second reason (who possibly could?). She says those words come from the credit bureau, and suggests you call there for an English translation. The bank thinks it doesn't need to explain.

Marty Dee of the credit bureau, TRW in Orange, Calif., says his bureau could give you a general definition of what words like "derogatory" mean but has no idea how the bank applies them to your account.

Hunt doesn't have a clue why he made the high-risk list. Ironically, while one department at Capitol One was jacking his rate, another department was mailing him a "pre-approved" Visa application with a 6.9 percent introductory rate, he says. When Hunt canceled his card, a bank representative called to ask why, then promised that, if he stayed, his rate would drop back to 13.9 percent. Hunt went.

Bank regulators ought to be taking a look at this issue. Under the Equal Credit Opportunity Act, the lender has to give you a reason for adverse actions such as adding a punitive rate to your credit card.

But do such confusing explanations as Hunt and O'Rourke got from Capitol One truly satisfy the law? David Medine, associate director for credit practices at the Federal Trade Commission, says, "If I were given those answers, I'd ask the bank who it's regulated by and file a complaint." (If you ask your bank to explain an adverse action, the letter you receive will include the regulator's name and address.)

Citibank and AT&T; Universal cards say your rates go up if you fail to keep your account "in good standing." "But what does that mean?" asks Ruth Susswein, president of Bankcard Holders of America in McLean, Va. Representatives for both cards say the penalty applies if you don't pay your bill on time (up 2 percentage points for AT&T;, to 20.9 percent today; up 3.5 points for Citibank, to 21.65 percent). But "in good standing" could be changed to mean other things, too.

Penalty rates, by the way, come on top of $10 to $15 fees every time you pay late or exceed your credit limit. Those fees have been rising, too. How do you avoid a penalty rate?

(1) Don't sign up for a card with a penalty rate (penalties are listed in the fine-print credit agreement).

(2) Hold down your debt and pay on time.

(3) Cancel unused cards, including department store cards. You can be penalized for having too many credit lines.

(4) Read your mail from the bank. You'll get a small-print disclosure, in advance, that your rate is going up. That gives you time to switch your debt to a lower-rate card -- which is what both Hunt and O'Rourke decided to do.

In 17 states, including Maryland, you can keep the card and pay off your debt at the old interest rate -- but only if you notify the bank in writing and quit using the card. The other states are: California, Colorado, Delaware, Illinois, Iowa, Maine, Mississippi, Nebraska, New Hampshire, New York, Oklahoma, South Carolina, South Dakota, Vermont, Wisconsin and Wyoming.

You can write to Jane Bryant Quinn at: Newsweek, 444 Madison Ave., 18th floor, New York, N.Y. 10022.

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