Saturday, October 4, 2008

You didn't change, but your bank says you did

Did you know that your bank can decide, based on factors unrelated to your payment history, that you are now a higher risk borrower and jack up your rates? Yes, they can. Some banks started a round of rate increases early this year and it looks like that trend may continue.

From today's Christian Science Monitor special blog, Global Credit Crisis, we get this:

“Credit markets seem to be dropping for a significant number of customers, especially those with riskier credit,” he says [quoting Bill Hardekopf of]. In addition, he has noticed that credit card companies seem to be reclassifying their customers downward. An individual considered to be an excellent credit risk may be downgraded into a “good” category. “So instead of getting the 8.99 percent rate that was advertised, instead they get the 10.99 percent rate,” he says.

What Mr. Hardekopf didn't make clear is, they can do this not just when you apply but at any time, because of specific clauses in your credit card contract that allow them to. Basically, the banks need money, and you may have some, so they are increasing their charges and you just have to pay...kind of like the bailout. We didn't cause it, but we just have to pay for it.

From USA Today back in February when this all started:

"Banks will want to make up that income somewhere," says William McCracken of Synergistics Research, a research firm. "They're going to be much more aggressive. Everyone is going to see some (price) increase unless they have perfect credit."

By raising rates and fees — but not boosting them so high that they push borrowers into default — lenders are seeking a "delicate financial balance," says Robert Manning, a finance professor at Rochester Institute of Technology. "They can't squeeze too hard that they're going to kill their client. But they have to squeeze more revenue out of their current portfolios."

So where do we go from here? Do we just let the big banks charge us more and more until we can't make our payments and then really do become a "bad risk"? Or do we say, no more.

Interestingly, there's a multi-agency rule pending that would stop this practice and make our contractual agreement with our own credit card banks more meaningful. The new regulation also proposes to stop credit card companies from allocating all of our payment only to the lowest interest balance while interest charges on the higher interest balance rack up.

The official comment period is over, and this rule could be approved as early as year's end, except that so much other business has suddenly piled up on regulator's desks. If you want to remind them to finish this rule because this is the kind of common sense regulatatory reform that actually helps real people, you can email them here.

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