<<back to credit cards

The credit card industry has been under fire again in regards to some of their practices. Consumers are complaining that their credit card company raised their interest rate for no apparent reason. These are consumers who were responsible and dependable in paying their bills on time and were meeting their credit card obligations. Senator Carl Levin (D-Mich) states that this practice seems unfair and is spearheading a reform for the industry. To review the commentary from a congressional hearing, click here.  

Some credit card companies have made changes to their practices due to the public scrutiny they have come under in recent months. We have heard lately, however, there are still companies who are raising consumer’s interest rates because their credit score has changed.

What appears to be happening
It has become common practice for a lot of credit card companies to perform reviews of consumer’s accounts. If the consumer is not paying on time or meeting their end of the contract, then in most cases, the credit card company will raise the interest rate on the card. What’s happening now is that, consumers are meeting their obligation, but after a review of the account, the card company feels it is in their own best interest to raise the interest rate on the card. This is mainly due to a drop in the consumer’s credit score due to over extension of credit, too many loan inquiries, etc.

These rate increases are not just applied to balances moving forward, but they are applying this rate hike to balances that were incurred prior to the increase.

Why would a credit score drop if you are making payments on time
Creditworthiness is typically represented by a FICO score, a system developed by Fair Isaac. This system is designed to predict the likelihood of default in the near future. These scores are generated by the credit bureaus and are based upon a mathematical formula.

This system is fairly straightforward; people with heavy debt loads – compared to their income or those who regularly make late payments - have lower scores. The most common misconception is that if consumers pay their bills on time, they will have a high credit score. This is not always the case. If a consumer has high balances compared to their limits (using the majority of their limits) on credit cards, their score is likely to decrease.

Another way a consumer’s credit score may decrease is by applying for additional loans (including credit cards, vehicle, first mortgage, etc.); even if the extended credit isn’t used. When the consumer applies for a loan, the company pulls the consumer’s credit report; this is referred to as an “inquiry.” The more loans a consumer applies for, the more inquiries there are on their credit report. In many cases, this may have a negative effect on the consumer as the creditors/Fair Isaacs see this as if the consumer is trying to obtain credit from everyone.  

What happens now
Consumers will have to wait to see if the government steps-in to place restrictions on the credit card companies.

No matter what, it's always a good idea to review your monthly credit card statement. If you notice a change or if something does not make sense, contact your credit provider. Please note: GECU will never raise your rate due to a change in your credit score; we do not follow these practices or do we have a Universal Default Clause.  

Source: www.businessweek.com, “Capitol Battle over Credit Cards,”
Jessica Silver-Greenberg, December 4, 2007, http://www.businessweek.com/bwdaily/dnflash/content/
dec2007/db2007124_454069.htm?chan=search,
January 7, 2008
 

<<back to credit cards