US credit card companies jack up rates

By Andre Damon

2 July 2009

Credit card companies have in recent months sharply raised the rates they charge customers, as credit card defaults have risen to record levels. Citigroup, the recipient of a $25 billion government bailout, has increased rates for millions of credit card customers by around one fourth. JPMorgan Chase & Co., the largest issuer of credit cards, also said it would raise its minimum payment rate from 2 to 5 percent for customers behind on payments.

The hikes come amid news that default rates for personal credit cards have hit record high levels. Fitch Ratings reported Tuesday that defaults on credit cards hit a record 10.4 percent last month amid rising unemployment, falling home values and reduced wages. Total losses on loans that credit card companies have given up on collecting have risen more than 62 percent from a year ago, according to the credit-rating agency.

On Tuesday, the Financial Times reported that Citi raised interest rates on 15 million cards co-branded with companies like Sears and Macy’s. Cardholders who did not pay off their entire balance saw their credit card rates increase by an average of 24 percent, according to research by Credit Suisse cited by the FT.

Meanwhile, JPMorgan Chase said that it would raise its balance transfer fees 3 percentage points, to 5 percent. It also announced plans to raise minimum payments for customers behind on their payments to 5 percent, up from 3 percent. The rate increase, scheduled for August, will come with additional fees for those borrowers who fail to make the minimum payment.

“I got a Citi credit card in college because they were offering zero percent interest rates for a year. They made it seem like you could just get credit for free,” one University of Delaware graduate told the WSWS. “Now, I’m out of college and have to pay my credit cards in addition to student loans. I’ve cancelled repayments on my student loans for a year just so I can pay the credit cards. Citi is charging something like 13 percent, and if I’m late on any payments the rate will be even higher.”

From the standpoint of the banks, the seemingly absurd and self-destructive practice of raising interest rates for people already behind on their payments only makes sense in the long term. These banks are ultimately betting that borrowers who are behind on their payments now will never pay back their principal amid falling wages and persistent unemployment. The banks are moving to extract the most in interest and fees that they can get away with, even at the consequence of their borrowers’ eventual default and bankruptcy.

Commentators noted that credit card issuers are raising rates preemptively to offset new federal regulations that would make it more difficult to raise credit rates for existing customers.

The Obama administration’s Credit Card Accountability Responsibility and Disclosure Act, signed into law in May and with some provisions taking effect next month, prohibits credit card companies from raising rates for existing customers unless they are at least two months behind on payments. (See “The credit card crisis and the false promise of the Obama administration”)

The window between the law’s signing and its adoption can only be seen as a deliberate loophole to allow credit card companies to raise rates to their preferred levels.

New York Democratic Senator Charles Schumer on Tuesday made a show of denouncing the act’s ineffectiveness, noting that the present outcome was entirely predictable. “This is what many of us feared about a law that didn’t take effect right away,” he said. “Issuers are using the delay in the effective date to wring more dollars out of their customers,” Schumer added.

Citigroup’s announcement on rate hikes comes a week after it said it would increase the salaries of its top executives by as much as 50 percent. (See “Record bonuses at bailed-out US banks”) Only a few days later, Forbes noted that Citi has already put aside $3 million as signing bonuses for two unnamed former Morgan Stanley executives, and likely had even bigger bonuses in the works for other new executives.

Citigroup received $25 billion in government aid during the height of the financial crisis, and in February the company announced that this stake would be converted into stock, making the US government in effect the company’s largest shareholder. Unlike banks such as Goldman Sachs and Bank of America, Citi has yet to pay back its nominal obligations to the government. This has not, however, prevented it from raising compensation for its executives.

The Obama administration has explicitly opposed all limits on executive pay, even for banks in which the US government is the largest shareholder. The government’s entire policy has been aimed at inflating the profit margins of the banking system, at the direct expense of working people. Even when the banks pursue policies—such as raising credit card rates—that hinder an overall economic recovery, the government has defended the most reckless short-term interests of Wall Street.