Today at 9:30 a.m., Senator Carl Levin (D-MI) will continue his investigation into the unfair and deceptive practices of the credit card industry. Today’s topic: arbitrary rate increases for cardholders in good standing. The hearing picks up where Senator Levin left off in March, when he questioned the use of excessive fees, interest charges, and the abuse of grace periods.
Today’s hearing will feature two panels. First, three aggrieved consumers will share their horror stories. Then, the presidents of Discover, Bank of America, and Capitol One will explain that the three consumers who just testified are not at all representative of average cardholders. Right.
The tears and lies start flowing at 9:30 a.m.
9:25: Two choices for your viewing and listening pleasure: Video Link—Audio Link
9:34: And we’re off. Levin has arranged for an interesting hearing. The first consumer we will hear from is Janet Hard. Janet is married to a steamfitter. She has a Discover card that jumped from 18% to 24% because her FICO score dropped. When Janet complained, the rate dropped to 21%. Discover’s President will testify today.
9:37: Levin is most incensed by the retroactive nature of rate increases. Take a consumer whose debt jumps from 15% to 27%. That new rate applies not to new debts, but to all incurred debts.
9:41: Bonnie Rushing has two Bank of America cards. One is associated with AAA. Both cards had an 8% rate. BoA bumped the AAA rate from 8% to 23% because Bonnie’s FICO score fell. It didn’t matter that her payment history was perfect. Bonnie isn’t sure why her FICO score dropped, but she thinks it may be because she opened a store-branded card at Macy’s to receive an immediate 10% discount on a purchase, unaware that it would affect her FICO score.
9:43: When Bonnie received the rate-increase notice, she opted-out and closed her account. BoA tried to pressure her to keep the new, higher rate, but after she complained to state and federal authorities, BoA let her close her account. BoA’s president will testify today.
9:44: Capital One raises rates by looking for accounts that haven’t been bumped in three years—but they don’t use FICO scores.
9:44: One consumer was hit by three rate increases in three months. Oftentimes the rates doubled or tripled. The consumer was able to reduce her rates by calling and fighting the credit card companies.
9:46: Levin: “If you shop with a credit card, as most consumers do, dangers lurk.”
9:46: Most people don’t realize that their FICO score drops even if they approach—not exceed, approach—their credit limit.
9:47: The Committee asked who determines a FICO score, who determines when a rate jumps because of a FICO score. The answer: computers.
9:47: Issuers don’t know why a FICO score drops. They have four “reason codes,” generic statements like: “balance grew too fast compared to credit limit,” or “balance on bank cards is too low.”
9:48: By law, consumers are entitled to know who supplies credit data. Even with this data, few consumers realize that a rate hike was caused by a lower FICO score.
9:50: When Janet Hard received her rate increase notice, she was told that it was because her balances were too high and her accounts were delinquent. When pressed, Discover couldn’t explain which balances were too high, or which accounts were delinquent.
9:51: Levin does not want any increases for consumers who pay their bills on time. At least not retroactive increases.
9:53: Credit card companies have drop rates when the Subcommittee calls to inquire about an account.
9:55: Levin’s solution is S. 1395, which would:
“bar companies from charging interest on debt paid by the due date, cap penalty interest-rate increases, prohibit interest from being charged on late fees or over-the-limit fees and prohibit late fees if a card-issuer delays crediting a payment.”
9:55: Senator Norm Coleman (R-MN) is claiming that the nature has credit has changed. It used to be something you earned. Now, creditors are tossing cards like confetti.
9:56: It seems like a personal problem, but it has nationwide implications.
9:57: For background: Abusive credit card practices affect everyone. In a country of 300 million, we charged more than $1.8 trillion dollars on over 691 million credit cards in 2005. Back in the eighties, Americans charged about $70 billion per year.
9:57: Coleman argues that the democratization of credit has helped America, but it has been tainted by federal regulations that raise rates. Eh? Coleman asked credit card companies to regulate themselves so Congress can focus on something else. Apparently, his strategy of “Be Nice, Please” is working. Double-cycle billing is now a thing of the past. See, no federal regulation needed. “These are serious steps and constitute self-reform.”
9:59: ‘There is a competitive advantage to offering fair user-friendly offers.’ Sure, but nobody does. At least he realizes that there still massive problems, with universal default and rate increases out of the blue.
10:00: Claire McCaskill (D-MO) argues that even lawyers can’t understand credit card offers.
10:01: Creditors hate closing accounts. You can’t call, or write on a bill that you want your account closed. You have to write a separate letter.
10:02: Senator McCaskill’s mother wrote in that she wanted to cancel her credit card. That didn’t stop them from sending her checks for the holiday season that would re-activate the card.
10:03: Excellent: McCaskill is calling credit card debt “The Next Subprime Disaster TM.” She is absolutely right.
10:04: If the credit card companies won’t stop financially raping Americans, McCaskill wants to break out some serious regulation.
10:04: Senator Tom Coburn (R-OK) has no opening statement.
10:05: Interesting: Levin is swearing in the witnesses. Most testimony is not sworn—there is simply no need. Lying to Congress is a felony that carries up to five years in jail.
10:06: Here is Janet Hard, the consumer with the Discover cards.
10:06: Janet is a registered nurse turned stay-at-home Mom.
10:07: She used credit cards to make ends meet, which is always a losing strategy. She figured that she could make boost her income when she went back to work when she stopped taking care of her kids.
10:07: She learned about the rate increases only after she realized that her payments were no longer reducing her debt at the usual clip.
10:08: Janet was initially told that the rate was increased because of a spot credit check. When she called to complain, Discover agreed that she was an excellent customer, but refused to drop the rates.
10:08: She also has an HSBC account, which accesses the same credit data. HSBC did not raise her rates.
10:09: She does not want to shirk her debts. She wants to be treated fairly. “We feel as though we’ve been robbed.”
10:10: Onto Bonnie Rushing. Downsizing cost her a job and income security, but she never missed a credit card payment.
10:11: Still, the rate on her BoA AAA card unexpectedly tripled. Bank of America said that she had been sent a change in terms notice without responding, and so her rate was bumped. Bonnie could no longer refuse the rate or close the account.
10:13: Bonnie tries escalating to a supervisor, who offered to renegotiate the rate down from 23% to 21%, still much higher than the 7.9% Bonnie had enjoyed.
10:14: AAA intervened and was able to press BoA into accepting the original, fixed rate of 7.9%
10:15: A bank executive told Bonnie that the change was made because she was a “good long-standing customer whose business they did not want to lose.”
10:15: Bonnie took her experiences with the call center very seriously. More than anything, she’s upset that they treated her without respect, without realizing that she was a decent person who was trying to responsibly pay off her debts.
10:16: Onto Millard Glasshof, who has been retired since 1992. He’s here with his wife.
10:16: In 1997 he received a MasterCard with Bank One. He originally agreed in 2004 to payoff a balance of over $5,000 at 14%.
10:17: In March 2005, Chase took over Bank One and bumped the rate to over 17%.
10:18: Millard had never missed a payment. Chase could not explain the increase.
10:19: He received a letter, which he didn’t understand. He thought it said that his new payments were $111. He called to confirm, which Chase did. When he paid $111, Chase hit him with fees for insufficient payments.
10:20: After the Subcommittee looked into his situation, Chase miraculously dropped his rate to 6%.
10:20: Janet’s original debt was over $8,000. She made only $500 in new purchases. Of $2,400 in payments last year, $1,900 went towards interest, not the principal.
10:22: Janet had no idea that her rate increase was triggered by her credit score. Her rates were dropped back to their original levels after the Subcommittee started asking questions.
10:23: Millard had $4,800 in debt. Last year he made no new purchases, but did pay $1,100 in interest and $200 in fees. He made $1,300 in payments and still owes $4,800.
10:24: Millard had no idea why his rate was increased.
10:24: He hasn’t missed a payment in two-and-a-half years.
10:24: Chase says that an automated review of closed accounts, like Millard’s, showed that his FICO score had dropped, triggering a rate increase.
10:25: Levin is really pissed that these rate increases are retroactive. More troubling, none of the consumers testifying realized that rate increases applied to past debts.
10:28: We remember a program we watched some years ago—it may have been Frontline’s look into credit cards—when our favorite debt-expert, Elizabeth Warren, explained that credit cards are the only financial instruments that retroactively raise the price of goods after purchase. How would you feel if the guy at the electronics store knocked on your door, pointed to the TV in your living room, and said “By the way, that now costs $500 more. Pay up.” We hadn’t thought of it like that before, and it bothered us greatly.
10:32: It may have been this Frontline episode. Well worth watching.
10:33: Back to the hearing. Senator Coleman wants to know why the consumers didn’t receive (or read) the notices from credit card companies.
10:33: Millard is arguing that he never read in any of his notices that his rate was increasing. That would have helped.
10:34: Janet thinks notices from credit card companies are deliberately misleading.
10:34: Coleman: “Do you know what the U.S. Prime Index is?”
Janet: “No, I do not.”
Coleman: *stunned silence*
10:35: Coleman: “I’m trying to figure out what, if anything, we can do with notices.” He thinks Janet was pretty much screwed from the start because of her debt levels. She had no hope. All her fault. “You may have been treading water, you may have treading for a long time.”
10:36: We have an idea for notification, Senator. If a credit card wants to increase a rate, they should sent a notice. The notice should have two lines in massive fonts that show:
- Your Current Rate;
- Your New Rate
Maybe an easy, one-step way to refuse or cancel would also be nice.
10:41: Senator McCaskill is reading the paragraph that raised Millard’s rate. Nobody understands what she is saying.
10:41: McCaskill: Did you call after you received this letter and ask what you were supposed to pay?
McCaskill: Did they send any confirmation?
10:42: Ok, we want back and found Elizabeth Warren’s statement:
Frontline: But they would say they’re just making capital or money available to people in a convenient way.
Warren: Well, in a convenient way, and changing the price after people borrow it. You know, that’s a heck of a deal. I don’t know any merchant in America who can change the price after you’ve bought the item except a credit card company. After you have borrowed the $5,000, they can change the interest rate from 9.9 percent to 29.9 percent. I just don’t know anyone else who can do that.
Hey, listen … you make exactly the point that the credit card companies keep trying to make: “Hey, … we don’t make anybody take the money.” And they’re right; they don’t hold a gun to anybody’s head when they borrowed that money. But they did the much, much slicker way, and that is, they just put it all into contract papers. They put it all in clauses that people can’t read. They put it all in things like “universal default terms” and “15 days to change the terms of this contract” and arbitration agreements that [say] “We will hold the arbitrator to see if we have abided by the terms of the contract.” … They have teams of lawyers to figure out just the way to write the contracts that will maximize the profits for the credit card companies and minimize the likelihood that any customer will quite figure out what has happened when he or she uses that credit card.
10:46: We think Tom Carper is giving a statement. He represents Delaware, where most of these credit card companies live. He’s going to ask the witnesses what they would do if they were credit card companies. This should be good.
10:50: Carper: Is it not unreasonable to raise rates when a customer’s risk increases?
10:51: Oh, he’s talking universal default, the most evil and hated practice where a credit card company boosts your rates because you didn’t pay a late fee owed to the library. Real fair and equitable.
10:51: Holy shit, I can’t believe this worked. Bonnie: “Credit card companies are businesses, they have obligations to their shareholders.” Come on, Bonnie, realize you’re getting played and hit back!
10:52: Bonnie walked into the trap, but at least she’s arguing that she met all her debts and should not have been subject to a rate increase.
10:53: Levin comes back to argue that the increases are automated and unfair. “If it’s a risk-based decision, isn’t it weird that you were sent additional blank credit card checks in the mail?”
10:54: We like Levin’s style. Rather than look over at Carper and say: “Dude, shut up,” he’s having every witness show that the rate increases had nothing to do with their risk profiles. Such a classy place, this Senate of ours.
10:57: Coleman’s back with a hypothetical. He’s asking if anybody would have a problem if they could no longer use their credit card and pay off the debt at the existing rate.
10:57: Nobody does.
10:58: Bonnie: “No, that’s how a contract should work.”
10:58: Carper is arguing that that current disclosure laws force banks to offer just that.
10:59: Bonnie: “No, they said I could not do that. Point-blank, ‘No.'”
11:00: Carper: Did you look for new credit cards?
11:00: Witnesses are confused. Why would they look for new cards?
11:01: McCaskill wants to know if anybody was warned that using a credit card to pay off another card carries separate charges.
11:01: Nope, nobody knew.
11:01: The witnesses are dismissed.
11:02: *Cue ominous music, summon industry representatives*
11:04: The representatives have also been sworn in.
11:04: Here is Roger Hochschild, President and CEO of Discover.
11:04: He’s going to talk about pricing policies.
11:04: Pricing is based on each customer’s risk profile. “We make every effort to ensure that a customer can manage the credit we give them.”
11:05: It’s because credit cards are different than other loan products. Each transaction is a new loan, and they’re responsible to make sure each loan is paid.
11:05: Now he’s going to talk about all the background work they to do to set a base APR.
11:06: “We decline more applicants for credit than we approve.” Really?
11:06: They don’t solicit high-risk customers or offer them special products like balance transfers. They even reach out to people who seem like they might be in trouble before their accounts are delinquent. Wow, what a great company.
11:07: “The risk associated with some accounts rises over time.” It’s just like automobile insurance, see? If you get in an accident, your rate increases. Not crazy, just reasonable.
11:08: When they raise rates, they give customers the option of closing the account and paying off the debt at the current rate.
11:08: Their philosophy is to “Do The Right Thing.” Just like Spike Lee.
11:09: Onto Bruce Hammonds of Bank of America, who sounds like he has the entrails of the poor caught in his throat.
11:09: “We constantly monitor our customer’s behavior.” And you folks worry about government.
11:10: 9%-10% of customers refuse higher rates, close their accounts, and pay off the debt at the old rate.
11:10: Risk-based pricing is good for consumers, says the largest bank in the country.
11:11: Ha! Customers who are re-priced often adopt better financial practices. Right, that’s what happens, BoA. Don’t feel free to provide data.
11:12: Bank of America is arguing that they are a friendly bank, even friendlier than Discover.
11:13: “Customers like our policies.” “We listen to our customers. I personally have spent hundred of hours listening to our credit card customers.”
11:13: “If any of us are wrong, the market will tell us.” (By crashing.)
11:14: Onto Ryan Schneider of Capital One. Repricing is an “essential tool.”
11:15: He just argued that credit cards are not like car insurance. Hear that, Mr. Hochschild?
11:15: “Capital One shares your concerns.” Awww.
11:15: They have just one policy that governs repricing. See, just one policy, which means consumers are safe.
11:17: Consumers need to miss a payment by more than three days twice in a year before they are repriced. Capital One does not look at bounced checks or FICO score shifts. They also don’t use universal default, which actually is a very good pro-consumer policy.
11:18: Levin’s first question to Discover: What happened with Janet?
11:20: Roger doesn’t want to talk about it, because it’s personal. But he will, anyway.
11:20: They used a “holistic approach” to her account. He just called her a liar and said she missed payments.
11:21: Levin is asking about her payment history.
11:21: Roger agrees that she was repriced even though she made all her payments over the course of a year. She was charged no late fees.
11:22: Ah, Roger is complaining about one late payment from March 2004.
11:22: Other than that, she was on time. What a terrible customer.
11:24: Levin is asking why Discover won’t agree to limit their use of universal default.
11:25: Roger: “Not using a cardholder’s behavior on other accounts is like taking the battery out of the smoke detector.”
11:26: Levin: “It’s not important to Citibank? It’s not important to Chase?”
11:27: Levin is lecturing BoA about the basics of fairness, calling them financial bullies. “Why should [your customer] be penalized because of some outside activity, which never happened—that she didn’t know of—why if it’s good enough for major companies like Chase and Citibank, why should you at Bank of America continue that practice?”
11:29: Bruce of BoA: Because their risk increases! “We have a responsibility to the safety and soundness of the institution.”
11:29: He disagrees with McCaskill, credit isn’t like the subprime sector—but would be if they lost the ability to reprice based on consumer risk. See what he did there, hijacking her argument?
11:31: Uh-oh, Bruce is angering Chairman Levin. In his testimony, Levin argues that BoA boosted Bonnie’s rate because she was getting closer to her debt ceiling, even after they sent her checks that if used, would bring her closer to her debt ceiling. Bruce is hedging, saying it wasn’t really the checks, it was other things, like um, you know, stuff. Levin does not seem convinced.
11:34: Senator Coleman wants to know if credit card companies can improve the way they give notice.
11:35: Regulation Z will already change the appearance of bills and rate change notices. Credit card companies supported the new regulations, in part, to escape from stricter action from Congress. That strategy might not work out.
11:37: Coleman: when you buy a car, you can compare to several others. Credit card companies are similarly different, with varying policies on rate increases, opt-out, etc. How can consumers judge the different policies?
11:38: Let’s see how the companies cloak their notices as something other than legalese.
11:38: Capital One sees the onus on Regulation Z to make notices clear.
11:39: BoA agrees, but it’s not easy because consumers want rewards and bonuses, and he doesn’t know how to keep up. And if consumers dislike BoA, they can go to any other competitor.
11:39: Discover thinks it’s great (not dangerous) that consumers have more than one card, because they can shift their business based on how companies satisfy their needs.
11:41: Discover: “Credit cards are excellent tools for the middle class.”
11:43: McCaskill wants to know why it seems that the behavior the companies encourage is the behavior they use to indicate risk.
11:44: She wants to know how her mother (oh, it’s personal) was charged $9 interest by a credit card company that owed over $200. How could she be charged interest by a company that owes her money?
11:45: Discover apparently has a guide to using credit wisely on the internet. McCaskill is not pleased with this answer.
11:46: She wants to know at what point they stop sending checks to people approaching their credit limit.
11:48: Nobody has an answer. It’s based on risks, not the credit line. “If the risk is up, we stop sending checks.”
11:48: McCaskill’s mother was obviously a high-risk card-holder, with lots of cards, lots of debt, but she still gets checks.
11:49: All three state they don’t use credit scores as the sole basis for raising any rate.
11:51: Good, McCaskill wants to see BoA’s data that consumers pay more after their rates are raised. “That seems mighty counterintuitive.”
11:51: The credit card representatives breathe a sigh of relief as they are embraced by the soft easy questions of Delaware Senator Tom Carper.
11:52: Now they get to talk about how much they care about consumers. They love us, they really do, and they constantly strive to keep us educated.
11:55: Carper: Do any regulators tell you how to manage risk?
11:55: Now everyone gets to point to Office of the Comptroller of the Currency as the source of meaningful federal regulation. Hmm, let’s scroll through the archives to see how past editors might characterize those meaningful regulations:
The Currency Comptroller routinely goes double-dildo with national banks to undermine states’ consumer protection laws.
11:57: Carper with a hardball: “What stops me from taking my business to another creditor? Because I get offers everyday.”
11:58: Everybody: Nothing stops you!
11:58: This is what preachers know as “call and response.”
12:01: Discover had no clue that they lowered a witness’ rate. It certainly had nothing to do with the hearing. Know how? Because otherwise Discover’s President would have known before this morning.
12:02: He does seem to know an awful lot about why her rate dropped, you know, for someone who didn’t know her rate fell.
12:03: Contradiction alert: Roger just said that any factor in the risk model could affect her risk profile, and that a credit score, by itself, could affect her rate. Let’s go back to 11:49:
All three state they don’t use credit scores as the sole basis for raising any rate.
Can anyone reconcile the discrepancy in this sworn testimony? Bueller? Bueller?
12:07: Levin wants to know about opting out.
12:09: All agree that it requires a proactive notice from a consumer.
12:11: Levin wants to know why people shouldn’t be able to opt-out at any point if they stop making payments and just put the card down.
12:12: His scenario: someone doesn’t understand the opt-out notice and just says “the heck with this company,” without making new purchases.
12:12: Discover: If they do not opt-out, right, they are charged the higher rate.
12:13: BoA: Yep.
12:13: Levin: “That strikes me as manifestly unfair.”
12:14: Levin wants to know if Hammonds of BoA is troubled by Bonnie’s rate increase from 8% to 23%.
12:16: Hammonds: Well, everyone used to pay 19%.
12:16: Levin: Did her story trouble you?
12:16: Hammonds: Sure, sure. But I do believe we made the right risk decision.
12:17: One of the highest indicators of risk is constantly making the minimum payments.
12:18: BoA discourages customers from making minimum payments. Behind the scenes, not say, by printing any warnings on the bill.
12:22: Levin is bringing the hearing to an end, but is reminding consumers that credit card companies do not treat their customers fairly. Several pieces of legislation are in the pot, and Levin will make sure the issue stays on the Senate agenda.
12:30: If you want to learn more about the inner workings of credit cards, we highly recommend that you watch Frontline’s documentary on abusive credit card practices. We also caution everyone as we roll into the holiday season, please use your credit card responsibly. Don’t take on debt you can’t afford, and don’t ever let anything stop your from paying off your credit card in full every single month.