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Even low-risk borrower suffering

The Baltimore Sun

Now that homeowners can no longer easily use their homes as ATM machines, they are turning back to credit cards.

The latest figures from the Federal Reserve show that consumers increased their amount of outstanding revolving credit -- mostly credit-card debt -- by $6.3 billion in June for a total of $904 billion. That's on top of a $9 billion increase the month before.

But cardholders beware. Card issuers, like other lenders, are now sensitive to problems in the beleaguered mortgage market and unlikely to give much leeway to consumers who start appearing risky. You may suddenly find your interest rate rising or your credit limit reduced.

"They are very, very sensitive to anyone who slips up on their payments, even just a little bit late," says Mark Zandi, chief economist at Moody's Economy.com.

Some consumer advocates say they have been hearing more complaints about interest rates suddenly raised and credit limits cut when customers were late with a single payment or took on more debt.

And sometimes it doesn't even take that.

Arthur and MaryLee Stritch say they always pay on time, have a good credit record and have not taken on more debt in the past year. Yet the Abingdon couple were notified last month that Capital One planned to raise their interest rate from 9.9 percent to 15.9 percent.

"It didn't explain why it was going up," says MaryLee Stritch, a librarian for a Baltimore County elementary school.

The Stritches got a Capital One card several years ago because it offered the lowest rate. "The commercial says 'What's in your wallet?' It really irks me to know since I got this notice that what's in my wallet is going up to 15.9 percent," the librarian says.

It will make a big difference for the Stritches, who carry a balance. If the couple maintain their $9,000 balance under the new rate, they would pay $540 more in interest in the first year.

Arthur Stritch, a semiretired consultant, suspects the rate increase is a way to make up for losses in the mortgage market. "All of it is tied together in the credit industry," he says.

Capital One spokeswoman Pam Girardo says the rate increase has been in the works for months and is unrelated to problems affecting the mortgage market. She says the customers' rates are going up for "business and economic" reasons, and rising interest rates are part of that.

But interest rates lately haven't gone up anywhere near 6 percentage points. For instance, the rate on the one-month London Interbank Offered Rate, an interest rate benchmark, went up only 0.18 percentage point in the past year.

"The move higher is related to borrower characteristics, such as their balance, new lines of credit or payment history," says Greg McBride, senior analyst with Bankrate.com.

Other credit card issuers, including American Express, JPMorgan Chase, Bank of America, say they periodically change a customer's terms to manage risk. But when it's been done lately, some card issuers say, people mistakenly assume that it is linked to the subprime mortgage mess.

"Unlike the mortgage market, credit-card issuers just didn't wake up to the prospect of risk three weeks ago. ... They are always concerned about the credit card portfolio," McBride says. "If you pose a greater risk to your credit card issuer, you can expect pre-emptive measures on the issuer's part."

The American Bankers Association's chief economist agrees, but adds the mortgage market's woes have highlighted the risk of lending.

"And there is no question, in my mind at least, that influences any decision about creditworthiness for mortgages, credit cards, car loans or personal loans," says economist James Chessen. Lenders are naturally going to make sure these days that they price their products in line with the risk they are taking given a consumer's credit history, he says.

The question now is: What's a consumer to do?

You can start by making sure you pay credit-card bills on time so you don't trigger any rate increases or other onerous changes.

"People sometimes don't understand that if you miss a number of payments, that signals to lenders that you may miss payments altogether at some point," Chessen says.

Read any notices from your card issuer that could be alerting you to changes. This will give you time to contact the card company to negotiate terms or shop for a new card.

A new Consumer Reports survey of nearly 36,300 readers found that negotiating often works, says executive editor Greg Daugherty. Half of those who asked the card company for a reduced rate got one, he says.

If your card issuer won't budge, shop for new plastic.

"The credit card market is extremely competitive, and there is often a solicitation in your mail box that says they have a better credit card that will meet your needs," Chessen says.

Shop for card offers at Card Ratings.com and Bankrate.com. Or, check out cards from credit unions, Daugherty says.

"According to our readers, credit unions treat people better and they often have lower interest rates," he says.

You can also improve your situation by paying down balances, especially if your credit limit has suddenly been slashed.

Curtis Arnold, founder of CardRatings.com, says a credit limit reduction has a variety of repercussions. If you carry a big balance, you can easily go over the new limit the next time you use the card and get hit with a penalty, he says.

Also, when a credit limit is lowered, you suddenly have a higher level of debt in relation to available credit -- a negative for credit scores, Arnold says. And if your credit score drops, the card company may raise your interest rate.

As for the Stritches, Capital One gave them more than a month's notice that their interest rate would rise. The couple can reject the new terms and pay off their balance under the old rate, although they can't use the card for new purchases. MaryLee Stritch says she wrote Capital One to complain but hasn't heard back.

"We're going to drop them," says Arthur Stritch. "We put the cards away yesterday."

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by email at eileen.ambrose@balt sun.com

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