Credit Card Rates Soar
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Extra: Credit Card interest rates skyrocket
Ginny Madden of Hastings is not pleased with the group of TV actors/barbarians in the Capital One commercials. They smash their way through lobsters and a violin, then ask "What's in your wallet?" The retiree is unhappy with what is in her credit card notice this month. You might say she feels "pillaged" by the card's new interest rates. "My rate will be going up to 17.9%." Madden's present rate is 7.9%. Thus, the new rate is more than double the old one. Madden must accept or reject the new rate by April 17th. She insists she has always paid her monthly statement on time and has never missed a payment. The explanation from Capital One spokesperson Pam Girardo in Virginia: "Capital One is notifying some customers that we are increasing their interest rate mainly to reflect the current risk environment." Girardo declined to reveal the number of customers affected by the rate hike. By telephone from Virginia, Girardo called the credit situation "very challenging," adding, "These types of account changes are necessary in order for us to account for the increased risk." Ginny Madden is not agreeing with the rate hike concept. "Not at 17.9! I probably would not have complained if it had gone up to 9. I could maybe understand that, but not to more than double it." As a result, her account will be closed and the card unusable. Minnesota Attorney General Lori Swanson is equally unsympathetic to the company. "I think that the credit card industry is in dramatic need of reform." Swanson sent a letter to the Federal Reserve Board in July, 2008 protesting alleged abuses in bank lending practices. She wrote that the credit card lenders "often use 'tricks of the trade' to make even more money from high fees and by raising interest rates." Seven months later, Swanson's anger at the practices has not abated. "Oftentimes, you haven't done a thing to justify or warrant the bank raising it. They just do it because they say they can. It's outrageous! And it's hurting people out there, especially now, because of the economy." University of Saint Thomas Business School Professor David Vang, Ph.D. sees the companies' dilemma differently. "You know, the rates appear to be very high, but credit cards require lots and lots of processing. Just think how many times a day a typical person might use their credit card, now imagine a bank having thousands and thousands of accounts like that. Every one of those transactions has to be recorded someplace, has to be tallied up. There's probably as much as 3% of the cost of the whole program just in the processing." Vang thinks the rising number of card holders defaulting on their monthly payments is threatening the lenders' profit margins. "Add the risk of maybe as much as 4-5% default. Now, we're up to almost 10% for some banks. They need a 10% or more interest rate on their credit card business before they even start to make a profit." Swanson was unmoved by Vang's argument. "I suspect, to the extent that they have costs, a lot of them are not so much processing costs of operating the cards, but marketing, advertising, mailing, as they promote these cards. They're pushing and hustling and marketing these cards, oftentimes, with pretty attractive terms initially, but when you get down to the fine print then they change the terms." Swanson also cries "foul" at the low interest rates that the banks, themselves, are being charged for money. "Yet, they're charging, you know, 28-29% interest. Largely, these large national banks are the culprits here, did a lot of bad lending. To the extent that they were not in the bad mortgage lending, they were involved buying up the bad mortgage lending, participating in hedge funds and credit default swaps. Now, their bad behavior is coming home to roost on everybody and it is hurting people." Minnesota, like most other states, has a "usury" law. It limits the amount of interest that lenders can charge for loans. The limit in Minnesota is 8% for fixed loans and 18% for open-ended loans like credit cards. Still, Swanson explains, banks have found a way "around" the state limits. "The problem is, the courts have said, it doesn't matter what the state usury law is. What matters is where the bank is located and what are the laws in the state where the bank has its headquarters." In simple terms, many lenders redefine themselves as "national banks," then move their headquarters to states like Delaware and South Dakota. Such states may have lower corporate taxes on the banks, but they also have little or no limits at all on credit card interest. UST's David Vang offers a quick way to check one's own bank's policy. "Look on your credit card where your bill is going. It's probably not going to a local Minnesota bank. It's going to a P.O. box in some other state. So, most likely, the firm that is issuing you your credit card was probably incorporated in a state that does not have a usury law." Minnesotans might regard that as "foul play," but they should remember that it was a Minneapolis bank, Marquette, that took a case against a Nebraska bank, to the U.S. Supreme Court in the 1970's. Swanson explains that "the U.S. Supreme Court said that the 'Doctrine of Exportation' will apply, so that the interest rate that a national bank can charge is the interest rate allowed in whatever state the bank is located in." That 1978 ruling was added to by the high court's ruling in the "Smiley" decision of 1996. The Court ruled in that case that late fees, over-the-limit fees, etc. are the same as 'interest' and were also subject to the 'Doctrine of Exportation'. Thus, in many cases, there are no limits to charges for those fees, as well. Which is why lenders are often free to charge very high fees in those situations. Borrowers may find the fees exorbitant, but Swanson says there is "really nothing the states can do. It is the Federal 'scheme' that we have right now and a lot of people are getting hurt by it." The Minnesota attorney general joined her 49 fellow Attorneys General in calling on President Obama to urge Congress to restore the primacy of state usury laws. "The only one that can act right now is the national Congress and I think it is important that they do it. The credit card industry is out of control and Congress ought to rein them in." Is Capital One worried about a backlash and exodus from their accounts? Spokesperson Girardo offered, "We obviously hope our customers will stay with us, but we know that it's an individual decision and they should make the decision appropriate for them." Girardo explained that if a cardholder chooses to decline the higher rates, they can do so by calling a number on the rate notice. Anyone choosing to opt out of the higher rates, will then have their account closed. They do NOT have to pay off any existing balance immediately. They can continue to pay off the balance at the old, existing rates on their account. There is another concern voiced by Ginny Madden. "I think it is probably going to affect my credit rating because that would be less credit available. It seems like your rating is based on the amount of credit that is available to you and the amount that you owe on those cards." As to whether closing the account would negatively affect the card holder's credit rating, Girardo said that would depend on the situation of the individual cardholder. She did say that Capital One would "code the account as closed by the consumer, as opposed to closed by Capital One." KARE11 contacted a Fair Isaac spokesperson Craig Watts in California. Fair Isaac is the Minnesota-based company that created the "FICO" score that is used by lenders around the country. His comment was that closing an account and lowering the available credit might or might not impact the "FICO" score. He did agree that listing the account as closed by the card holder would be better than a company closure in the view of the credit reporting agencies.
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