Credit-card companies defend higher rates

WASHINGTON — WASHINGTON -- Credit-card issuers defended their interest-rate-setting policies at a Senate hearing yesterday as consumers told lawmakers about how sudden changes in those rates have burdened them.

A subcommittee of the Senate Committee on Homeland Security and Governmental Affairs is looking into the practice of raising the interest rates of cardholders who have complied with the terms of their cards.


Subcommittee Chairman Carl Levin, a Michigan Democrat, is aiming to pass a bill that would protect consumers from some sudden interest rate increases.

"When a credit-card issuer promises to provide a cardholder with a specific interest rate if they meet their credit-card obligations, and the cardholder holds up their end of the bargain, the credit-card issuer should have to do the same," Levin said yesterday.


Sen. Norm Coleman said cardholders should never be startled by a rate increase and called for more companies to make their policies transparent and predictable.

Coleman, a Minnesota Republican, called for "clear, user-friendly disclosures and common sense, straightforward alerts to changes in a card's terms."

The subcommittee heard from consumers who said they were hit with whopping increases in their interest rates.

Janet Hard, of Freeland, Mich., for example, told senators that the rate on her Discover card rose from 18 percent to 24 percent in February. She said a Discover representative explained to her that the company did a spontaneous credit report and determined she was at risk of default.

Representatives of Discover Financial Services, Capital One Financial Corp. and Bank of America Card Services defended the risk-based pricing system, which allows the companies to factor the probability of a borrower defaulting into the interest rate.

"The ability to make risk-based and default-based price adjustments to annual percentage rates [APRs] allows us to offer credit to a wider segment of the public and to price credit at a level appropriate for each borrower," said Roger C. Hochschild, president and chief operating officer of Discover Financial Services.

Hard was late in paying her bill three times in one year, Hochschild told the subcommittee.

Ryan Schneider, president of Capital One Financial Corp., argued that it is a matter of fiduciary responsibility to be able to modify card terms in response to changes in the economy or a consumer's creditworthiness.


He added that congressional attempts to restrict that ability would result in a restriction on credit.

"The consequences of imposing severe restrictions on the ability to reprice such loans in response to these changes could include significant reductions in the availability of credit to many and higher pricing for all, particularly to those historically under served customers who pose a higher level of risk," Schneider said.

Sen. Barack Obama of Illinois, who is seeking the Democratic nomination for president, said Monday that if he is elected chief executive, he will put in place a credit-card "bill of rights" for consumers.

Obama said his plan would prevent credit-card companies from raising interest rates without giving consumers the option to opt out of the agreement. It would also ban rate changes to past debt and prevent credit-card companies from charging interest on transaction fees.

The American Bankers Association sought to defend card companies by distributing a five-page summary of credit-card "myths" versus "facts," saying, for example, that it is a myth that Americans are "up to their eyeballs" in credit-card debt.

"About 75% of American families have one or more credit cards, but only about 46% of all families carry a balance while 54% pay their outstanding balance in full each month," said the summary.


The trade group also said consumers are in "complete control" of their cards.

"By choosing the right card for their needs, paying their bills on time and avoiding purchases they cannot afford, consumers can completely avoid finance charges, late fees, over-the-limit fees and other penalty fees," the group said.

Sen. Claire McCaskill called credit-card debt "another economic disaster that's waiting to happen" and said lawmakers would come up with new rules if the industry itself didn't act. "We will eventually force it upon the credit-card companies if they do not become more consumer friendly," said the Missouri Democrat.