Lawmakers Take Aim at Credit Card Hikes

Universal Default Provision Called "A Disturbing Intrusion"

By Anne Zieger
ConsumerAffairs.com

September 1, 2004
A bill filed in the New York General Assembly would make it illegal for credit card issuers to raise interest rates or increase fees based on unrelated activity on a New York state consumer's credit report. Similar legislation is pending in Congress.

At present, nearly all of the top U.S. credit card issuers, including Citibank, MBNA, Capitol One and Providian, include a condition in their service agreements known as "universal default." Under this provision, the banks reserve the right to check a consumer's credit regularly and make changes to the interest rate if they find something they don't like.

A memo supporting the New York bill, which is sponsored by Assemblyman Peter Rivera (D-Bronx), describes the universal default clauses as "a disturbing intrusion into the private matters of the credit card holder."

Unfortunately, most consumers don't know what they're getting into when they accept contracts allowing banks to take these steps, Rivera says.

"Anyone reading through the extremely fine detail of these credit card agreements is sure to miss the sections that spell out that the rate of interest on their credit cards will be impacted by late payments to other entities," he says. "Most consumers don't know this practice exists."

In plain English, if a consumer is late in paying to any creditor , takes on too much debt, or even, in some cases, pays only the minimum due balance on the card, the credit card company jacks the interest rate up as much as 20 points, with rates in the 30 percent range not uncommon. This happens even to consumers who have never been late or gone over the credit limit with the credit card company making the increase.

Not only that, consumers who want to protest the rate change may find themselves shut out of the legal process. Most credit card service agreements include an arbitration clause under which consumers agree not to file a lawsuit or join in a class-action suit against the bank.

Instead, consumers must meet with an arbitrator of the bank's choosing when resolving disputes, notes M. David Meagher, a San Diego attorney who has represented consumers in disputes with credit card lenders.

Rivera isn't the only elected official taking a closer look at credit card interest rate hikes. A similar measure was filed in Congress last year by Representative Bernard Sanders (I-Vermont), a ranking member of the House Subcommittee on Financial Institutions and Consumer Credit. Sanders' bill, the "Credit Bait and Switch Prevention Act," would have amended the Fair Credit Reporting Act to forbid card issuers from basing rate increases on information gleaned from consumer credit reports.

The bill hasn't yet gotten a hearing by the full House, but Rep. Sanders plans to keep the issue on the front burner during the next session of Congress, according to Warren Gunnels, Sanders' legislative director.

"This issue impacts everyone in the United States," Gunnels says. "The more people learn about it, the more outraged they are."

Rivera's and Sanders' efforts recently got a boost from presidential candidate John Kerry, who proposed in late August to ban this type of interest rate increase. If Kerry wins the presidency, says Gunnels, "I think we'd have a lot of momentum on this issue. Senator Kerry wouldn't have taken it up as a policy initiative if he didn't see it was significant."

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