Credit Card Crunch

Could surging credit cards bills become the next sub-prime crisis?

When the going gets tough, the banks get even tougher. Already being battered for pushing sub-prime mortgages on ill-equipped customers, America’s lenders are facing increasing flak over their uncompromising attitude to credit card debtors.

Democrats in Congress saw red this week over a widespread practice among card issuers of ratcheting up interest rates just at the point when customers’ credit records get worse.

Take, for example, a Chicago native, Marvin Weatherspoon. For the last 26 years, he has held a steady job at the Windy City’s main conference centre, McCormick Place. A member of the SEIU union, he is supervisor in the centre’s linen department.

“I’m responsible for all the linen in America’s biggest convention centre,” he says. “I’ve tried to be equally responsible in paying my bills but that doesn’t seem to matter to Bank of America.”

Weatherspoon consolidated $12,000 (5,920) of bills into one account in 2000 in the hope of reducing his aggregate repayments. But instead, he says, BoA has raised his interest rate to 25% and has doubled his minimum payment.

“You’d think I’ve been a bad customer, the way they treat me,” he says. “But I’m not - I pay my bill every month by automatic deduction.”

A Michigan nurse, Janet Hard, delivered a similar tale to a Senate subcommittee this week. She has held a Discover credit card for years. In 2006, all of a sudden, her interest rate shot up from 18% to 24%. Over 12 months, she paid $2,400 - more than a quarter of her debt of $8,300. But only $1,900 went towards reducing her borrowing, while the rest was eaten up by interest.

The reason for Ms Hard’s hike? Because her FICO score - an opaque credit measure poorly understood outside the top echelons of the financial industry - had dropped. This can be a result of something as simple as signing up for a storecard to getting a discount on a purchase. his score, to Discover, was more important than the fact that she always paid her bills on time and never exceeded her credit limit.

It may seem odd that credit card companies raise the bar quite so suddenly and sharply. But Nessa Feddis, senior federal counsel for the American Bankers Association, says it’s a straightforward issue of supply and demand.

“Rate equals risk,” she says. “Just as riskier drivers pay more for car insurance, riskier borrowers pay more for credit.”

She says card issuers have a responsibility to their broader customer base to manage awkward loans and to ensure that they will be repaid. Before monitoring credit scores, she says, companies tended to be caught out by seemingly reliable on-time payers who suddenly filed for bankruptcy, allowing them to default.

“There’s so much competition out there - if you don’t like the rate you’re being charged, go somewhere else,” she adds. “Credit cards aren’t spouses - you’re dating, not married. You can always leave and go somewhere else.”

Small adjustments

Carl Levin, a long-serving Democratic senator for Michigan, has proposed legislation protection consumers from sudden rate hikes. He says automatic adjustments are out of control: “Today, in most cases, no human being is involved at any point in deciding who will get an interest rate increase, selecting the interest rates to be imposed, and notifying the affected cardholders.”

A degree of movement is taking place. Two major card issuers, Chase and CitiCards, have agreed to stop raising interest rates in response to lower credit scores. That, at least, should give those who are struggling a little more breathing space to keep up repayments. Others though - including Bank of America and Discover - are sticking to their guns.

Americans have a staggering 690m credit cards - that’s more than two for every man, woman and child. For many people, barely a day goes by without a “personalised, pre-approved” application appearing on their doormat. An estimated 8bn solicitations get sent out every year. America’s card debt is around $900bn compared with a relatively modest 56bn in Britain.

Aggressive, irresponsible tactics by mortgage firms are already threatening to tip the US economy into recession. Some feel that credit cards could blow up next.

Claire McCaskill, a newly elected Democratic senator from Missouri who is co-sponsoring Levin’s bill, says her own mother has struggled to cope with rocketing credit card debt.

“I think most Americans don’t understand that they are in a hole in terms of minimum payments, and I think, frankly, we are not preparing for what could be the next sub-prime disaster,” she says. “I believe the next sub-prime disaster is the debt that is out there within the credit card obligations in America.”