Many people were surprised by a letter they received. Although they had good credit history, their interest rates were to be hiked up to 29.99%, an extremely steep increase. Citibank, a popular bank and credit card lender has sent such notice to more than 20% of their customers.
Can Credit Card Companies Raise Interest Rates?
In an effort to prevent credit card regulations in 2007, Citibank promised Congress that it won’t raise customers’ interest rates until their accounts expire. However, citing a “difficult market environment” and financial losses, the chief administrative officer for Citigroup’s credit card division justified going back on the promise so the company could continue lending in a troubled economy.
Why So High?
An interest rate increase is typically used as a penalty (Are you creditworthy?). Before the credit crisis, a cardholder has to have missed a payment or bounced a check to trigger a drastic interest rate increase. However, cardholders receiving the letter about increase haven’t done anything wrong. The letters explain the rate increase allows Citibank to “continue to provide our customers with access to credit.”[i] However, there seems to be more to it.
Several provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) will go into effect this February. Thus, it appears Citibank is trying to squeeze out as much profit as possible before the law becomes fully active.
The Act prevents credit card companies from retroactively raising interest rates on the current and existing balance of cardholders in “good standing.” As a result, Citibank and other banks are raising their interest rates before that provision goes into effect. These hikes are done now since interest rates increases after the law takes effect will be less significant.
It’s upsetting to have you interest rate increased when you haven’t done anything wrong. Many long-term loyal customers reacted by closing their accounts and sending complaints to the bank and consumer groups.
Also, a result of this abuse of power by raising their interest rates so dramatically before new regulations go into effect, lawmakers have been active to get provisions of the law to become effective sooner.
Benjamin Bernanke, the current Federal Reserve Chairman, stated in a U.S. House hearing that speeding up the law “could benefit consumers by providing important protections earlier than scheduled.” Bernanke continued, “card issuers must be afforded sufficient time for implementation to allow for an orderly transition and to avoid unintended consequences, compliance difficulties and potential liabilities.”[ii]
What Can You Do?
If you get a letter in the mail saying your credit card company will be raising your interest rate, read the fine print. Paying your balance in full is the best way to prevent dealing with the interest rate increase. However, that can backfire as well; credit card companies don’t make much money on people who pay their bills in full each month.
You can choose to “opt out.” Meaning that you can close your card but keep your old interest rate until you pay the balance. Citibank cardholders have until January 2010 to opt out.
The Future: Usury Caps?
What Citibank is doing is unpopular, but it’s not illegal. There aren’t any usury laws in the United States. Usury caps typically aren’t favored; however, the sentiment is changing as the financial crisis continues.
With the proposed usury caps and the Credit CARD Act going into effect, credit card companies will have less leeway to increase their fees and interest rates. Until then, they’re doing whatever they can to work the situation to their advantage. As a customer, it’s important to carefully read any information received from your bank and credit card company and follow up on it.
Questions for your Attorney
- Will opting out of an interest rate increase by my credit card company affect my credit rating?
- Can I protect my credit card interest rates from increasing?
- How can I fight the interest rates hike without closing my credit card account?