- The Washington Times - Sunday, December 27, 2009

Mary McNulty and John McGraw don’t charge much on their credit cards anymore.

They pay upfront for what they need - though Mrs. McNulty, of Cockeysville, Md., still uses a store card for her prescriptions.

Credit-card issuers are raising their rates, cutting their credit limits and increasing minimum payments for what Mrs. McNulty calls “arbitrary” reasons.

Consumer advocates say the companies are increasing interest rates across the board ahead of a landmark credit-card-reform law that prohibits rate increases on existing balances in good standing. The companies are also devising “tricks” that appear to conform to the new law but could trap consumers in debt, advocates say.

The law takes effect in February.

Mrs. McNulty, 61, and Mr. McGraw, 31, both have long-term balances they’ve been paying down faithfully at a fixed interest rate for years - stemming from a divorce in Mrs. McNulty’s case and tuition bills in Mr. McGraw’s.

Three years ago, around the time of her divorce, Mrs. McNulty took out $20,000 in cash advances from a Citibank card at rates as low as 2 percent. Then she took advantage of another offer by transferring $8,000 to a JPMorgan Chase card.

She has been paying off the debt faithfully each month and is down to a $7,000 balance on her Citi card and $1,900 on the Chase card.

Both companies have been flexible with her due date since she depends on monthly alimony checks from her husband, she said. Citi has not raised her low promotional rates. To the contrary, it has increased her limit and sent her checks to encourage her to borrow more - at higher rates.

But Chase raised the rate on her balance transfer from 8.99 percent to 12.99 percent. She was able to “opt out” of the increase, meaning she could continue paying off the balance at her previous interest rate, but that her account would be closed if she did so.

Since a closed account is a red flag in the eyes of credit-scoring agencies, one day in the mail came a statement about her SunTrust Visa bank credit card - which she doesn’t use - saying that her rate would be changed from fixed to variable as a result of her decreased credit rating.

Mr. McGraw, of Gaithersburg, Md., used his money to earn a degree in electrical engineering. He said Chase has been consistently lowering his credit limit - once so much that the monthly finance charge would have triggered an over-limit fee and cost him his low promotional rate.

Fortunately, he checks his account twice a week and was able to quickly pay down his balance to keep himself under the lowered limit.

Chase has also raised his minimum payments on a card with a low-rate balance but kept a low minimum payment on a card with a higher-rate balance.

“They are obviously trying to only speed up payments on low-rate, locked-in cards. I still have pretty big balances at these low rates, and some of the things they’ve done to try to shake me out of them have been pretty shady.

“I think anything they can, they’ll try to do. I’m so good at watching them they’re almost giving up with me,” he said.

Citi raised the interest rate on new purchases to 29.99 percent on two of his cards, he said.

“It almost seems like they go so far that it’s not even in their interests, like with Citi at 29 percent. It’s so outrageous I don’t even think it’s in their interests,” he said.

With credit card debt of more than $60,000, Mr. McGraw said he would be unable to pay it back at higher rates, even with a new job that pays $77,000 a year.

“If I lose some of those low-rate offers, even with my good income, I don’t know what I would do,” he said.

Mr. McGraw locked in rates as low as 2 percent for some of his cash advances going back five years.

It was a great deal then - better than he could have gotten anywhere else and maybe too good to be true - but it was supposed to be the same deal for the life of the balance, he said.

But times have changed, and now credit-card issuers are changing the deal.

A JPMorgan Chase spokesman did not follow up on a request for comment Wednesday, but did say the company does not comment on individual accounts.

Citi spokesman Samuel Wang also said his company does not divulge information about individual customers. “These actions are necessary, given the doubling of credit-card losses across the industry from customers not paying back their loans and regulatory changes that eliminate repricing for that risk,” he said.

Lauren Bowne, a staff lawyer for Consumers Union, said issuers were getting their rate increases in while they can.

“They’re trying to make up their bottom line on the backs of consumers,” she said.

“They’re raising rates across the board. They’ve changed people’s rates from fixed to variable because after the new rules go into effect, a variable rate is the only time a rate can be increased on existing balances,” she said, referring to the Credit Card Accountability, Responsibility and Disclosure Act, passed by Congress last spring.

The law was intended to ensure that consumers understand what their loans will cost them before they borrow. It prohibits credit-card companies from raising rates on existing balances unless the borrower is more than 60 days late with a payment.

Ms. Bowne and Mrs. McNulty question why the law was scheduled to go into effect so long after President Obama signed it.

“It gave them plenty of time to get all their stuff in before it takes effect,” Mrs. McNulty said. “A blind person could have figured that out.”

Citi’s new rates are eye-popping, Ms. Bowne said.

“Citi raised really good customers to what has been considered default rates of 29.99 percent. Then they offered a 10 percent rate refund each month if [customers] pay in full and on time, but if you’re one day late, you lose the rebate.”

That could violate the intent of Congress by constituting a “hair-trigger” loss of an interest rate, she said.

Another new wrinkle is partially variable rates. Essentially, they are rates that go up more than they go down, because an interest-rate floor is built in, she said.

Finally, the card issuers are dropping credit lines and closing card accounts when consumers aren’t spending enough in order to limit the companies’ risk. Yet those actions also can hurt customers’ credit scores.

“They are frantically trying to preserve their profit margin. They’re really pushing the limits of the spirit, if not the letter, of the law,” Ms. Bowne said. “The drastic changes of the last six months won’t be possible after February,” she said.

Consumer lending is lucrative and will remain so after the law takes effect, Ms. Bowne said.

“If credit-card companies are going to say they can’t make money without tricking consumers, then it’s not a viable business plan,” she said.

Citi defended its rebate plan, under which a consumer who has been placed under the new 29.99 percent rate could in effect pay 19.99 percent, or one-third less, as a way to reward certain customers.

“Nearly all of our customers now have the opportunity to earn back a portion of the increase each month,” Mr. Wang said. “And eligible customers who do more business with us will have the most opportunity to reduce their rates. As before, every customer has the choice to opt out and pay off the existing balances over time at their current rate.

“We want to reward our customers for doing more business with Citi,” he said.

Ms. Bowne thinks the industry will settle down after the law has been in effect for some time.

“I think everything is going to level out. The credit card companies are still going to have to compete for good customers. Customers will shop for the best terms,” she said.

Still, Mrs. McNulty resents Chase’s actions.

“They put a black mark on me, and I’ve never been late,” she said.

She was advised to file for bankruptcy during her divorce and she refused, she said, despite her modest income.

“People loaned me money in good faith. I owe it to them, and I’m not declaring bankruptcy,” she said.

She also refused her attorney’s advice to make just the minimum payments on her credit cards as a way to cope with lower alimony. She knew she could never reduce her debt that way.

For all that, her credit record suffered.

Mrs. McNulty complained to a Chase customer service representative.

“I said, ‘You’re going to end up losing all your good customers and end up with the slugs, the people that don’t pay.’ And she said, ‘I’m sorry, ma’am, that’s what we’re doing across the board.’ ”

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