The Freedom From Debt Blog

A Senate Subcommittee held a hearing on Tuesday to investigate many common practices of credit card companies.  The committee is concerned that many of these practices could be unfair and potentially abusive to consumers.

Pay on Time Every Month, Have Your Interest Rate Raised

One issue at the center of the hearing was the case of consumers who make their payment on time, every month and having their interest rates raised to rates as high as 30%.  Some of these consumers were even paying significantly more than the minimum payment.  What justification would a credit card company have for raising such a customer’s interest rate?

Credit card banks say that the reason this happens is due to a consumer’s changing risk profile.  The risk profile depends on many different factors, including the underlying costs to the lender and, of course, the card holder’s credit rating.  So even if the card holder is making timely payments every month to one creditor, he or she may be defaulting on another account.   

However, even consumers who do not default on anything may see their interest rates unexpectedly skyrocket.  This is because a consumers credit score can drop for a variety of reasons, not just due to missed payments and defaults.  Lenders take any significant drop into account, and may penalize the card holder for such a reduction in credit score.

Will Legislation Stop These Practices?

Despite the Senate hearing, it is unlikely that legislation will be passed to ban such practices.  The banking industry will be sure to lobby heavily against any such legislation, and creditors defend these practices as legitimate and even helpful.  Many lenders reason that this type of risk-based pricing allows credit to be granted to many consumers who otherwise would be unable to have access.  Bankers also contend that it is necessary to protect banks from losing too much money to defaulting customers. 

Related Posts:
Credit Cards Raising Interest Rates, Payments
Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders
Credit Scores Affect More Than Credit Card Interest Rates