Why Is Bank Of America Raising Interest Rates On Its Good Customers?
BusinessWeek has just published an article about Bank of America's recent surprise mailings in January to some of its customers, announcing "that it would more than double their rates to as high as 28%, without giving an explanation for the increase." These customers have good credit scores and hadn't made any late payments, and those who called Bank of America to ask why this was happening weren't given clear reasons. Industry experts say Bank of America has reached a "new level" of "lack of transparency in raising rates," beyond anything Citigroup and JP Morgan Chase currently practice, because BoA is apparently using some undisclosed internal metric to determine who gets the rate hike.
The easiest explanation is that BoA is just trying to get rid of customers who don't make them any money, usually by carrying extremely low balances or no balance at all. But the anecdotal evidence suggests otherwise:
Michael Jordan, 25, a software developer who lives in Higganum, Conn., says he received a letter from Bank of America in late January advising him that his card rate would rise from 9.99% to 24.99%. The software developer, who earns $80,000 per year, says he was "shocked" because his payments had been on time and his credit score hadn't changed in the last year. In fact, Jordan says, he has only $4,500 in overall outstanding credit-card debt on two cards and that, on the Bank of America card in question, he had paid down his balance to $3,000 from $3,700 last August.Some analysts think the bank might simply be trying to shore up profits in anticipation of dealing with the "profit sinkhole" that is Countrywide Financial and the anticipated rise in charge-offs and write-downs as the economy continues to falter. "Boosting rates on existing credit-card holders is one of the quickest levers a bank can pull to try to boost earnings," says one analyst.
(Thanks to W!)
"A Credit Card You Want to Toss" [BusinessWeek]
(Photo: Getty)
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You are only a "good customer" anymore if you are heavily in debt & making the bank tons of money.
Anyone else is who is actually responsible are the scum of the earth "bad customers".
What is with this sudden abuse of what are usually the good credit risk people?
So BOA loses money, they buys a company that is losing even more money so they make their customers pay for it?
Sounds like the best thing to do is move your balance elsewhere asap and tell BOA where to stick their interest rate. Then pay it off right away before someone else tries this trick.
I still want to know if these interest rate increases impact your fico in some subtle way or some other metric banks are using.
@forgottenpassword: I only agree with you partially. Completly delinquent people who are in a ton of debt aren't good customers either. What is the magic formula these banks want? It has to be somebody that doesn't just have debt, but has debt they are managing. Because just oweing them money doesn't make them money. (or does it?) YOu actually have to pay in to the system. I assume the bank would prefer you pay regularly into an unfillable debt however.
So really, what the bank wants is struggling customers, not customers who simply dont' pay, and not customers that pay off everything with ease.
What they want is for you to suffer financially and to be subserviant to them.
So wait, this guy makes his purchases at rate x, and the bank can arbitrarily start charging rate y (where Y = x*3) on all his transactions made at rate x?
How is that not fraud?
They're targeting people they know won't leave for another bank.
@char: Because the contract that you sign to obtain the credit card states that they can change any of the terms at any time.
It's evil, but it's legal.
The banks need capital. They write $10 worth of loans for each $1 in assets. That means when they write off (sub-prime mess) loans they gotta raise money quickly to keep from violating that 10 to 1 ratio. That's why you seeing all these stories about foreign investors buying big chunks financial companies that have had big sub-prime writeoffs. The financial companies needed capital. ANOTHER way to raise capital is to charge the customers more.
Long term, not a good idea. But they're interested in surviving the short term - they'll worry about the long term later.
BANK OF AMERICA = BANK OF FEES
Probably doing it because they have to borrow their required reserves from the Fed. Check out thes graphs, at least one bank is borrowing from the TAF to cover reserves and most likey it is a few banks.
I pay my balance on time and in full each month and i haven't noticed any APR increases over the last 5 years. Honestly i don't think it's going to matter whether they increase it to 50% beacuse i never carry a balance. If the apr was in fact that high and i knew I was making a big purchase I couldn't pay off right away then i'd either ask them to lower it or close the card.
How are they going to raise any money this way? Won't any sane person just take a 0% balance transfer from another card? Won't they actually lose money that way?
I got off the phone with FIA card services today, which I think is owned by BofA now, and they refused to waive a late fee (one day late) and were surprisingly rude about it. In the past they were more than happy to "forgive" a late fee once a year.
Their sudden attitude change must be because of the switch from MBNA to BofA. I had the card for years and I enjoyed getting on the phone with them, until now.
I don't know how you feel about consumer advocate Clark Howard but he's been advocating that customers flee BoA for a few years now (for an unrelated, but seemingly valid, reason). Details here.
I was just going over my BofA bill to see if a credit had been issued and then saw that my rate was increased to the higher rate. Now on that card I have carried a low balance since the rate was so low, but was livid to see the new 28% rate. I called them up and they told me some crap and I asked the rep to see if they can lower it to what it was before. The rep put me on hold for 15 min and told me they can lower it to 18%, which I had them do. They were pushing their cash advance option to me really hard as well.
Hubby and I had a BoA credit card. When we got that notice, we told them to go play with themselves, er, I mean, that we would opt out. We'd continue to pay it off just like we were currently doing and when it was paid off, they would not have our business. We thought that jump in interest rates was a little rude and decided to vote with our dollars and do business elsewhere.
If you pay in full, it doesn't matter what the rate is.
I would never recommend banking with Bank of America. They have a bad history as it is, and then purchased MBNA to run their credit card department. MBNA is known for all sorts of practices that are bad for consumers like universal default and the like.
This kind of action doesn't surprise me at all coming from MBNA.
@Empire: Not if you're mountainloads in debt and your credit is shot. No creditors will extend you good terms with a balance transfer!
Ironically the best thing for BOA is the absolutely worst thing for consumers, paying tons of interest forever. But if you really get in deep they did you the favor of stripping bankruptcy so it is harder to discharge debt.
I'm putting on my tin foil hat here for a moment. Sell lots of risky loans and initially rake in lots of cash. Get the bankruptcy code rewritten to take away many forms of consumer debt relief. Start screwing your customers. What am I missing here?
@JeffCarr: except that i have an mbna-bought-by-boa card that was FIXED FOR 10 YEARS! the second boa had it in their grubby hands, they converted the rate to variable & shot it up from 11.99% to 20%+.
i used to use that card a lot b/c my alma mater gets a portion of the interchange fees every time i use it (plus it has the mascot on it & says "alum"). not anymore. i even called to negotiate the rate & 2 csr's & a supervisor said it was absolutely the lowest rate possible. f***ers.
i too heard some bad stuff about mbna - but that was mostly about their collection dept.
@bohemian: it's not a total screw job. you can still file full discharge if your unsecured debt = 25% of your "income" (after the judge waves his magic wand to tell you what that is).
moral of the story: charge the shit out of your cards before you talk to your lawyer.
But here's the funny thing. I got behind on a credit card that had been MBNA. BofA offered (they did, not me) to accept 19 cents on the dollar as full payment of the balance, without reporting it negatively beyond the 30-day late.
Boehmian: They didn't anticipate screwing themselves in the BK rewrite. Ooops.
I used my BofA CC to convert $3,000 to Euros. They treated it as a cash advance, so I paid it in 9 days before the bill came and they still charged me $20 in interest for 9 days. The rate was 24%. Never again with them. I pay my CC off every month, this is robbery.
Confession time.
Long ago, after about four years of working I got an unexplained credit of $600 on my bank's credit card. So what did I do? I spent it on regular stuff I usually buy until i used it all up (nothing fancy... didnt go on a shopping spree or anything). Hoping the bank would never notice. And they didnt. A few years later they lost one of my paycheck deposits & acted like complete pricks when i raised a fuss. I was so pissed that I closed my account & went elsewhere.
Years later I got a letter saying that I still had money in my old closed account. It was the money (my paycheck) they originally lost. I immediately went to cash out & REclose the account. The tellers were stupified that I had money in an account that i closed years ago. I told them that they had lost a deposit of mine years ago & it was the reason i closed the account. I cashed out & REclosed the account.
If a bank screws up in my favor again.... I wouldnt report it. Yes, I am shameless.
I'm wondering. Do the banks make any money on the transaction itself?
I know this is why banks are really pushing people hard to go away from credit and onto debit cards now. Debit transactions are more lucrative for the bank itself in terms of fees from the retailer.
The guy makes $80,000 a year, and he's only managed to pay off $700 in 6 months?! And he's giving himself a pat on the back?!?!?!??!!?!? This guy is definitely doing something wrong... With a salary like that you should have no issue paying a whole lot more than that.
@G0lluM:
Hey I loved clark howard. I used to listen to a replay of his show every night while at work until the station replaced it with Michael savage. I learned a lot listening to his show. Kinda miss it.
@bohemian: I don't think it's tin-foil hat. They're losing one of their cash cows (high interest, high risk mortgages) and replacing it with another (high interest credit cards). Its a game of numbers, as long as the vast majority of people who carry a balance, keep paying and don't declare bankruptcy (even with the tougher rules), they win. In essence, pure captialism- they will charge as much interest as the market will bear. Since many people are carrying balances and can't (or don't think to) transfer the balances, they're taking it for all its worth.
This happened to me. I have a BoA amex, paid on time about 90 per cent of the time, and never put more than 500 dollars on it.
THANKS BOA! I'll put about 25 bucks on it now, just to keep it open, and take my business elsewhere.
It is sad though, because if I ever had an emergency I might resort to using it (at the ridiculous interest rate). Tin foil hats, anyone?
Why would Michael Jordan need to worry about credit card debt?
Dang, 28%? Incredible. All this is going to do is make people feel morally justified in walking away from all their debt, just like they are walking away from their homes, in droves. Dumb move, BofA. You're next.
This can only be a massive corporate sphincter clench. I think it is a sign of some heavy crap coming down the chute soon. And sorry about all the fecal analogies, but I really think the shit is about to hit the fan.
Michael Jordans of the world unite and fight the evil BofA.
GolluM - Clark Howard is on anytime you want to listen. Although his radio show is streamed during his live slot (1 - 4 EST on clarkhoward.com), his Podcasts are available to listen to on your schedule. Personally, I LOVE the Podcasts since for each hour of his show, you get 35 minutes of Clark - and NO COMMERCIALS. On a related subject, his cohort at WSB Radio, Neal Boortz, from time to time mentions that someday he hopes to be Podcasting too - but I think it's pretty transparent why he isn't (no commercials = no $$$$$).
@Ariah: "Because the contract that you sign to obtain the credit card states that they can change any of the terms at any time.
It's evil, but it's legal. "
Not necessarily. Just because they print it on their paper does not MAKE it "legal". It makes it an agreement. They can print whatever they want.
I'm not saying that this particular action in question is illegal, my point is only that just because they say it's so and you 'agreed' does not make it legal.
Under the right circumstances one can make a case that something in an "agreement" is unreasonable and take it to court where THEY determine it's legality.
I make this point only because I think it's important for people to understand that if a private entity draws up a contract and you agree to it, it does not make whatever they say in the contract legal.
I have no clue whether or not contesting this specific issue in court would work, I would guess not, just making an overall point that terms of a contract are not law.
I'm glad I don't have a BofA credit card, but I fear opening up my next Compass Bank statement because they will probably have raised my rates to something outrageous.
If they have, I'm moving over to USAA and transferring the balance.
God bless my usaa 5.99%
booyaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa
CHIIEDDY: Yawn. And I didn't say I took them up on it. Don't make assumptions.
@bohemian: No tin foil hat necessary. I was predicting exactly this strategy before the bankruptcy laws were changed. The banks spent over a decade getting this strategy in place.
This is why there are those sweet, sweet 0%-5.99% APR balance transfer deals.
First, I hope the backlash against BoA will be great enough that it will scare other banks from doing the same. Second, look at your other cards. I noticed my Amex quietly went up from 13.49 to 16.49%--maybe it happened a while ago and I just never noticed because I pay off my bill each month, but I thought with the rate cuts the trend would be going down rather than up.
Even for those who pay off their bills on time, the rise affects us because what if there's an emergency, or what if somebody loses their job, gets sick etc . . . hopefully none of us would need to fall on our credit card but I've been there when there was an auto repair bill and storm damage to house that needed to be repaired asap. Luckily, I had an emergency fund but I wiped it out--but for a brief moment, very brief, I contemplated putting the repairs on a credit card--thankfully my contractor only took checks or cash.
As for BofA--I had an old MBNA card (alumni one) that I thought I closed but I guess I didn't cause I got a notice it was converting to a BofA card--and if I used my new card I'd get a free meal at Olive Garden (or something like that). Well, I decided against using this card and now I'm glad I did.
Chase isn't innocent either! I had my pristine 7.99%APR card jacked up to 23% last month for no reason!
@XianZomby: The magic formula is having 3-4k in debt, never missing a payment, but not paying much more than the minimums so you pay off the debt very slowly, which is what this guy was doing.
Proposed increase on my card is from 13.5 to 27%. Carrying a high balance, but good payment history and good credit rating. To opt out of the increase, my account is now inactive until the balance is paid down to approximately 25% of the credit line.
moral of the story...don't have any debt