Carl Levin, Chairman, U.S. Senate Permanent Subcommittee on Investigations Hearing: Credit Card Practices: Unfair Interest Rate Increases.
Opening Statement:
"This hearing is the second in a series of Subcommittee hearings
examining unfair credit card practices. Today's focus is on credit card
issuers who hike the interest rates of cardholders who play by the
rules—meaning those folks who pay on time, pay at least the minimum
amount due, and wake up one day to find their interest rate has gone
through the roof—again, not because they paid late or exceeded the
credit limit, but because their credit card issuer decided they should
be "repriced." To add insult to injury, credit card issuers apply those
higher rates retroactively to consumers' existing credit card debts,
which were incurred when lower interest rates were in effect.
Let me give you a few examples taken from the Subcommittee
investigation into the interest rate practices at the five major credit
card issuers who handle 80% of U.S. credit cards. These examples are
also summarized in a set of eight case histories in Exhibit 1, that is
a part of the hearing record.
Janet Hard of Freeland, Michigan is a registered nurse, married with
two children, whose husband is a steamfitter. She has had a Discover
credit card for years. In 2006, out of the blue, Discover increased the
interest rate on her card from 18% to 24%.
Discover took that action, because Ms. Hard's FICO score had
dropped. FICO scores, developed by the Fair Issac Company, are numbers
between 300 and 850 that are generated by a complex mathematical model
designed to predict the likelihood that a person will default on their
credit obligations within the next 90 days. FICO scores are compiled by
credit bureaus who supply them upon request to credit card issuers
seeking the scores of their cardholders. Discover's policy is to put
more weight on a computer-generated FICO score than on the fact that,
for years, Ms. Hard had always paid her Discover bills on time, never
exceeded her credit limit, and always paid at least the minimum amount
due.
After increasing her rate, Discover even applied the higher interest
rate to her existing credit card debt, which in my book fits the
definition of a retroactive rate increase. The 24% rate boosted her
finance charges and the minimum payment she was required to make each
month. It took Ms. Hard some months to realize that, despite making
larger payments, her debt was hardly decreasing. When she saw her
interest rate had been hiked to 24% and complained, Discover lowered it
to 21%, still above where she started.
The higher interest rates have made it more difficult for Ms. Hard
to pay off her debt. Under her old rate of 18%, when she made a $200
payment, about $148 went to pay for the finance charges and $52 went to
pay down her debt. With the 24% interest rate, out of that same $200
payment, about $176 went to finance charges and only about $24—less
than half the amount previously—went to pay down the principal debt.
Over the last twelve months, Ms. Hard has kept her
credit card purchases to less than $100 and has made steady monthly
payments of $200 to reduce her debt. At the end of a year, her payments
totaled $2,400, but due to those high interest rates of 21 to 24%,
almost all of her money went to pay for finance charges. In fact, out
of her $2,400, about $1,900 went to finance charges and she was able to
pay down her principal debt by only about $350.
Millard Glasshof of Milwaukee, Wisconsin, is a senior citizen living
on a fixed income. For years he faithfully made a $119 monthly payment
to Chase to pay off a credit card debt that is now about $4,800. In
December 2006, a year ago, out of the blue, Chase decided to hike his
interest rate, from 15% where it had been for years, to 17% and then in
February to 27%.
Why? Chase had decided to conduct an automated review of all its
closed credit card accounts where balances were being paid off. Because
that automated review found that Mr. Glasshof's FICO credit score had
dropped, it hiked his rate. Think about that. His account was closed.
He made no new purchases. All he did for years was send in his payments
like clockwork. But his interest rate was automatically hiked from 15
to 27%. Not only that, to rub salt in the wound, the new 27% rate was
applied retroactively to his existing credit card debt, and his finance
charges skyrocketed.
Under the 27% interest rate, out of his $119 monthly payments to Chase,
about $114 went to pay for finance charges and only $5 a month went to
pay down his principal debt. And even those $5 reductions were wiped
out by sky-high fees. For example, Mr. Glasshof was often charged a $39
per month over-the-limit fee, until at our last hearing in March Chase
ended its policy of charging repeated over-the-limit fees for going
over the credit limit once. In addition, in August 2007, Mr. Glasshof
got a confusing letter from Chase indicating that his minimum payment
would change. He called Chase, was advised he could pay $111 instead of
his usual $119, paid it, and got hit with a $39 fee for not paying
enough.
The end result, as shown in this chart, Exhibit 2(b),
was that, over the last twelve months, Mr. Glasshof made payments
totaling about $1,300, but was charged about $1,100 in interest and
$200 in fees, which meant that none of his $1,300 in payments reduced
his debt at all.
Then there's Bonnie Rushing of Naples, Florida. She has two Bank of
America cards, one of which is affiliated with the American Automobile
Association ("AAA"). For years, she paid both credit card bills on
time. For years, both cards carried an interest rate of about 8%. But
in April 2007, out of the blue, Bank of America increased the interest
rate on her AAA card—not by a handful of points but by tripling it from
8% to 23%. Bank of America tripled the rate, because Ms. Rushing's FICO
score had dropped, and the bank used that FICO score to raise her rate,
ignoring the fact that, for years, she had paid her credit card bills
to Bank of America on time.
Ms. Rushing, by the way, like Ms. Hard and Mr. Glasshof, doesn't
know why her FICO score dropped. She speculates that it may have been
because, in January and March 2007, she opened Macy's and J.Jill credit
cards to obtain discounts on purchases—15% off some cosmetics and 20%
off some clothes. She didn't realize then that simply opening those
accounts and receiving those cards could negatively impact her FICO
score and hike her interest rate.
When Ms. Rushing first saw the higher rate on her April billing
statement, she called Bank of America, explained she'd never received
notice of a rate increase, and wanted to opt out by closing her account
and paying off her debt at the old rate. Bank of America personnel
responded that she had already missed the opt out deadline and pressed
her to accept a higher interest rate. Ms. Rushing resisted. She closed
her account. She wrote to the Florida Attorney General; she wrote to
this Subcommittee; and she called AAA. Bank of America finally agreed
to restore the 8% rate on her closed account, and refunded the $600 in
extra finance charges it had collected in just two months.
Linda Fox of Circleville, Ohio is a working grandmother. She has had
a Capital One credit card for more than ten years. In April 2007, out
of the blue, Capital One increased her interest rate from 8% to 13%.
Capital One raised her rate, not because her FICO score had dropped
(Capital One doesn't use FICO scores to raise rates), but because
Capital One had decided to pass on so-called additional borrowing costs
to its cardholders. Capital One's automated system selected accounts
whose interest rates had not been increased in three years and had what
the system deemed a "below market" interest rate. Ms. Fox's account was
one of many selected, and the higher rate was applied retroactively to
her existing credit card debt. She tried without success to opt out and
get her old rate back. Six months later, in November, after a
Subcommittee inquiry, Capital One allowed Ms. Fox to close her account
and pay off her debt at the old 8% rate.
We have additional case histories, but I'll stop with just one more. In
2007, Gayle Corbett of Seattle, Washington was hit with interest rates
hikes on three separate credit cards in three separate months. Bank of
America increased her rate from 15% to 24%; Citi more than doubled her
rate from 11% to 23%; and Capital One hiked her rate from 15% to 19%.
Bank of America and Citi acted because her FICO score had dropped,
while Capital One had selected her account as part of its practice to
unilaterally pass on borrowing costs to its cardholders. After many
calls, Ms. Corbett was able to convince each of the companies to
partially or fully retract its rate increase. As a result, the interest
rates on her three cards have settled for the moment at 10%, 19%, and
15%. She told the Subcommittee that contesting these multiple
increases, none of which were her fault and all of which threatened her
ability to repay her debts, had left her exhausted and worried about
what happens next.
These case histories cause me a lot of worry too. In the United
States, December is a big shopping month. Stores, advertisers, and
sometimes even the President, are urging shoppers to spend more. But if
you shop with a credit card, as most Americans do, dangers lurk that
few consumers realize could damage their financial future.
Suppose, for example, you spend up to—but not over—the credit limit
on your credit card. Most Americans don't realize that if they get too
close to their credit limit, their FICO score could drop and trigger an
interest rate increase on their credit cards—even for credit cards that
they've paid on time for years—even for closed cards whose debts
they're paying off. And the same lower FICO score could trigger
interest rate hikes on more than one credit card, increasing the debt
on each one. At least 50% of U.S. credit cards carry debt from month to
month, and the average American family today has five credit cards.
Interest hikes on multiple cards at once could spell financial disaster
for working families.
Among the issues the Subcommittee has been investigating are who
determines an individual's FICO score, who decides when a lower FICO
score will trigger a higher credit card interest rate, and who actually
sets those higher interest rates. What we found is that most interest
rate decisions are not made by individual employees, but by computer
systems programmed to react to credit scores.
It works like this. Take a look at this chart, Exhibit 2(c).
FICO scores are generated by three so-called credit bureaus, Equifax,
Experian, and TransUnion. To produce the scores, each credit bureau
collects credit data from a variety of sources, including payment data
from companies administering mortgages, car loans, utility bills, and
credit card accounts, and information taken from bankruptcy and tax
proceedings, debt collectors, and others. This credit data is fed into
the credit bureaus' computer systems on a continuous basis.
The credit bureau computers take in, store, and organize the
information so that a "credit report" can be called up for any one of
hundreds of millions of individuals. Each credit report identifies the
individual by name and address; lists what types of credit that person
has, including any mortgage, car loan, or credit card; and describes
whether the person is current or behind on the payments. The report
also indicates whether that person has been the subject of debt
collection efforts or has declared bankruptcy. In addition to compiling
the credit reports, the credit bureaus apply a complex mathematical
model, developed by Fair Issac Company, to analyze the data in each
report in an attempt to predict how likely the person is to default on
their credit obligations in the next 90 days.
The model focuses primarily on such factors as the extent to which a
person is past due in paying their bills, the level of debt incurred,
and the extent to which the incurred debt is close to the person's
credit limits. Recent debt collection actions and bankruptcies are
considered key factors that predict a greater likelihood of default.
After analyzing the data in each credit report, the model assigns each
person a FICO score, that number between 300 and 850 that is supposed
to predict the likelihood of a default in the next 90 days.
Fair Issac has designed the FICO scoring system so that the lower
the number, the more likely the person is to default in the next 90
days. A person with a 720 FICO score, for example, is seen as having
odds of roughly 1 in 22 that they will default in the next 90 days; a
person with a 680 score has 1 in 9 odds of defaulting; and a person
with a 620 score is seen as having roughly 1 in 4 odds of defaulting.
So the lower the score, the greater likelihood a person will default.
Major credit card issuers typically check the FICO scores of each of
their cardholders every 30-90 days. Since each issuer has millions of
cardholders, millions of FICO scores are fed into the issuer's computer
systems on an automated basis. If a cardholder's FICO score drops, the
issuer's own automated, risk analysis system automatically flags the
account for additional review. The issuer's system then uses the
person's FICO score and actual payment history at the issuer to
generate an internal credit score evaluating the cardholder's
likelihood of defaulting in the near future. If that internal credit
score falls within designated criteria—even if that cardholder has a
perfect record of making on-time payments to the issuer—the credit card
issuer's computers use other criteria to select a higher interest rate
for that cardholder. The system then sends a notice to the cardholder
that the increased rate will be applied by a specified date, unless the
cardholder follows certain procedures to opt out of the increase by
closing the account.
The automated process I've described, capable of making credit
decisions on millions of accounts, has been in operation for years.
Today, in most cases, no human being is involved at any point in
deciding who will get an interest rate increase, selecting the interest
rates to be imposed, and notifying the affected cardholders. While
human beings do program the computers and sometimes are brought in to
decide a small portion of individual cases, the vast majority of credit
card interest rate increases today are being decided and imposed on an
automated basis. And those automated rate increases can and do hike the
interest rates of people with excellent histories of on-time payments.
To make interest rate decisions, the issuers' automated systems are
driven by numbers, primarily FICO scores. What the Subcommittee has
learned is that the mathematical models generating the FICO scores are
so complex that even experts have trouble predicting what actions will
increase or lower an individual's score. Take, for example, the
situation where a person opens a new credit card account in order to
obtain a discount on a purchase. Opening a new credit card could
increase a person's FICO credit score if they have only a few credit
cards and don't use up a lot of the available credit on the new card.
But the same action could lower another person's score if they already
have a handful of credit cards and buy a big ticket item that uses up
or comes close to the credit limit on the new card. As the FICO experts
explain, every factor depends upon every other factor to determine a
person's score, so it is difficult to predict how specific actions
affect an individual's FICO score.
The Subcommittee also learned that, although credit bureaus
typically transmit not only a person's FICO score, but also the
underlying credit report containing the information justifying that
score, credit card issuers typically do not review or keep that credit
report. The credit bureau does not retain the credit report either,
because its automated systems are continually updating all of its
credit information with the latest data streaming in. That means,
unless a cardholder requests a credit report soon after a FICO score is
transmitted to an issuer, the specific information used to generate the
specific score may be lost.
In most of the case histories we examined, when a credit card issuer
was asked by the Subcommittee to explain why a particular cardholder's
interest rate was increased, the issuer pointed to the person's lower
FICO score. When we asked why the FICO score was lower, usually the
only information the credit card issuer provided was a list of up to
four "reason codes" supplied by the credit bureau at the time the lower
score was transmitted. These reason codes provide generic statements on
why a score is reduced, using such phrases as "balance grew too fast
compared to credit limit" or "total available credit on bankcards is
too low," without identifying the specific facts that support or
explain these statements.
By law, credit card issuers who rely upon a credit score to increase
an interest rate must inform the cardholder of the identity of the
credit bureau who supplied the score, how to contact that bureau, and
the cardholder's right to review their credit report and correct any
wrong data. Issuers often include that information in the same notice
that informs a cardholder of an upcoming interest rate increase. The
Subcommittee's investigation has found, however, that few cardholders
understand that their interest rate hike was caused by a lower credit
score. And even for those who do make that connection, the
investigation has found that it is difficult to look at the person's
credit report and identify what factors caused their score to drop.
None of the cardholders contacted by the Subcommittee had known that
their interest rates had been triggered by a lower FICO score. Janet
Hard, for example, said she'd asked Discover why her interest rate had
been increased but was never been informed that it was because her FICO
score had dropped and so never requested or reviewed her credit report.
In response to the Subcommittee's request, Discover provided the three
reason codes transmitted by a credit bureau to explain Ms. Hard's lower
score, which stated that the "proportion of balance to credit limit"
was "too high" on her credit cards, she had too many "established
accounts," and she had "accounts with delinquenc[ies]." But Discover
didn't know what balances were "too high," how many accounts were too
many, or what accounts had delinquencies. Ms. Hard felt the stated
reasons were inaccurate, since she has always been careful to pay all
her bills and is current on all of her accounts. When we examined Ms.
Hard's credit report, we were also at a loss to explain these
references, since her accounts are all paid up to date. We did notice
that, just before her 2006 rate increase, the credit report showed she
was 30 days late paying a J.C. Penny credit card bill, but it is
unclear if that lowered her score. We had the same difficulty in the
case of Bonnie Rushing; Bank of America was unable to confirm whether
her credit score dropped because, in early 2007, she opened Macy's and
J.Jill credit cards to obtain discounts on purchases. The bottom line
is that the credit scoring process is at times akin to a black box; no
one knows exactly how it works or what lowers a score, yet it has
become the primary driver of interest rate increases for tens of
millions of Americans. To me, if a person meets their credit card
obligations to a credit card issuer and pays their bills on time, it is
simply unfair for that credit card issuer to raise their interest
rates.
Equally offensive is the practice of credit card issuer's applying
the higher interest rate, not just to future debt, but retroactively to
a cardholder's existing debt. Take the case of Ms. Hard again, a woman
who faithfully pays her bills on time. For the last year, she kept her
purchases on her Discover card to less than $100 and paid $200 every
month to reduce her debt. When Discover hiked her interest rate from
18% to 24%, it applied the higher rate to her existing debt. After she
complained, Discover lowered her rate to 21%, but that was still above
where she started. Over the past twelve months, she has paid Discover a
total of $2,400—more than a quarter of her $8,300 debt. But $1,900 of
those dollars did not go to pay down her debt; they were eaten up by
the sky-high interest rates. At the end of twelve months, despite
paying $2,300, she reduced her debt by only $350. If that isn't unfair,
I don't know what is.
One last point, which has to do with the appearance of arbitrary
credit card interest rates. Credit card issuers have attempted to set
up automated systems that assign interest rates using objective
criteria based upon cardholders' credit risks, represented by their
FICO scores. But look at the case histories we've investigated. Over
the course of the last year, even though his credit circumstances
didn't change, Mr. Glasshof's credit card with Chase was assigned
interest rates of 15%, 19%, 27% and 6%. That 6% rate, by the way, came
after the Subcommittee inquired about his account. Another case
history, which we haven't mentioned so far, involves Marjorie Hancock
of Massachusetts. She has four Bank of America cards, carries similar
amounts of debt on each, and presumably presents each with the same
credit risk. Yet all four cards have different interest rates, 8%, 14%,
19%, and 27%.
The bottom line for me is this: when a credit card issuer promises
to provide a cardholder with a specific interest rate if they meet
their credit card obligations, and the cardholder holds up their end of
the bargain, the credit card issuer should have to do the same. That's
why I've introduced legislation with Senator McCaskill and others, S.
1395, aimed at putting an end to these and other unfair credit card
practices, and ensuring that cardholders who play by the rules are
protected from unfair interest rate increases, including rate increases
that are retroactively applied to existing credit card debt.
Senator Coleman, I would like to thank you and your staff for your
ongoing participation in the Subcommittee's investigation into unfair
credit card practices. That participation has greatly assisted in the
Subcommittee's understanding of the industry practices being discussed
today.