- The Washington Times - Thursday, February 7, 2002

Historically low interest rates have prompted many Americans to buy homes and cars, but others are seeing their rates climb as the credit-card industry tries to make up for revenue lost on consumers who are paying bills late or filing for bankruptcy.
Some 3.3 million of Providian Financial Corp.'s 18.5 million customers, for instance, have seen their accounts jump from a 23.9 percent to a 29.9 percent rate since Sept. 30. The San Francisco company, which is nursing an ailing loan portfolio, said the rate rise on its high-risk accounts would amount to $5 billion in additional revenue.
Rising delinquencies and bankruptcy filings are to blame, credit-card issuers say.
"There's got to be a way to make money on our accounts, and if we have customer accounts that are really risky, we have to do something to combat that," said Providian spokeswoman Laurel Munson.
American Express raises delinquent accounts to a punitive 23.9 percent rate for missed or late payments. But the card issuer considers lowering the rate after 12 consecutive months of good credit behavior, said company spokeswoman Judy Tanzer.
The language in credit-card agreements is becoming more vague, giving credit-card issuers room to raise rates as they please, said Robert McKinley, president of CardWeb.com, a Frederick, Md., company that tracks the industry.
"It's come to where they say, 'Any changes on your credit worthiness and we can raise your interest rate,' so yes, you can make a late payment and that will trigger the higher rate," he said. "But now they also look at your credit file on a regular basis, and if they see you missed a payment with another creditor, they will consider that as basis to raise your rate because they now consider you a high-risk customer."
Americans owed $581 billion on major cardit cards Visa, MasterCard, American Express and Discover as of Sept. 30, according to CardWeb. They owed another $100 billion on retail-store cards, such as Sears or Macy's.
Nessa Feddis, senior federal counsel at the American Bankers Association, said risk-based pricing allows more people with poor credit histories to obtain cards. She also said the practice discourages cardholders from making late payments.
But Mr. McKinley disagreed, arguing that during recessions consumers already have a hard time paying bills without having to deal with additional punitive fees and rate increases.
"Delinquencies and bankruptcies have been rising," he said. But increasing the rates for people struggling with bills "might give more incentive for them to throw their hands up and file for bankruptcy, because they realize that they can't win."
CompuCredit Corp., of Atlanta, is another credit-card issuer to raise rates. The company charges 12 percent of its clients those considered high-risk 35 percent. Direct Merchants Bank also has high rates, at 23.9 percent. NextCard and Sears follow with a 22.9 percent rate, according to CardWeb.
High-risk consumers are typically people with no credit history, students or young cardholders, and consumers emerging from bankruptcy.
While some credit-card issuers racked up record profits last year, a few issuers the same who are raising interest rates had a terrible year.
American Express reported net sales last year fell 5 percent to $22.58 billion from $23.68 billion in 2000. Net income dropped 53 percent to $1.31 billion (98 cents per share) from $2.8 billion ($2.07).
For its fourth quarter, ended Dec. 30, American Express said net revenue fell 3 percent to $5.87 billion from $6.07 billion. Meanwhile, net income dropped 56 percent to $297 million (22 cents) from $677 million (50 cents).
CompuCredit said its net revenue for last year fell 12 percent to $213.56 million from $242.06 million. Net income plunged 49 percent to $41.64 million (89 cents) from $82.37 million ($1.87).
For the fourth quarter, ended Dec. 30, CompuCredit's net revenue fell 20 percent to $45.8 million from $57.3 million a year earlier. Meanwhile, net income dropped 51 percent to $5.61 million (12 cents) from $11.34 million (24 cents).
The Federal Reserve has cut rates 11 times in the past year, reducing overall credit-card interest costs since January 2001 by nearly $12 billion annually. That's an average of about $150 per U.S. household, according to CardWeb.com.
Credit-card issuers base their rates on the prime rate, which banks raise or lower in step with the Fed's moves. Many consumers saw their rates drop as the Fed slashed rates last year. But the last quarter-point cut in December, which drove the prime rate down to 4.75 percent, was essentially a non-event for credit cardholders. The main reason is floor rates, a minimum interest rate below which a credit-card issuer will not go.


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