Suddenly changing rates, terms whack credit card holders

Dale Petrie always thought his card company wouldn't mess with his terms or interest rate as long as he paid his bill on time.

"I thought it would be based on behavior," said the 38-year-old St. Paul man. "You don't expect an arbitrary change of 75 percent."

Instead, interest on his cards jumped from 12 percent to 19 percent over the last few months.On one card, an American Express, a $33,000 line of credit was reduced in May to $3,800. And that's a problem for Petrie because he's been out of work for the last nine months. The accountant lost his job when the business he worked for shut down. He's needed to carry balances on credit cards to make ends meet.

"I've got to use what I've got to use," he said. "What am I going to do, not pay the mortgage, not pay the bills?"

Petrie said the standard line from credit card companies has been that these changes have come because of "changing business conditions." Others in MPR's Public Insight Network who have seen the rise in credit card rates or a cut in credit lines have said they were told the move was due to "business decisions" or "due to the cost of doing business."

What's coming down the pike for credit card lenders are new regulations by the federal government as part of the Credit Card Reform Act. The measure passed by Congress last spring is designed to curb fee increases and curb abusive billing practices. The measures were set to take affect next February, but Congress is working on legislation to accelerate the timetable to December 1.

That was a response to what congressional leaders saw as an attempt by credit card lenders to raise fees and interest rates in advance of the law taking affect. Now Sen. Chris Dodd is calling for congressional action to freeze credit card rates until the new law takes affect.

A study just released by the Pew Charitable Trusts says that median advertised interest rates on bank credit cards have risen between 13 and 23 percent from December 2008 to July 2009. That's not taking into consideration that last few months. Also, none of the bank issued cards would meet requirements under the Credit Card Refom Act.

Petrie says he has no choice but to accept the increased rates. Others, however, are cancelling the cards. But some of those folks, like Stacie Peacock of Minneapolis, say there have been ramifications for shutting down the credit card account.

"Every time I closed an account or a balance was reduced, my credit rating dropped. My credit score went from 725 to 630 during this process. It has since begun to climb and is now up to 676. I was denied a mileage perk credit card because of this. I was also denied a decrease in my Credit Union Home Equity Loan because my score had dropped below 700."

This is the reality of the situation for consumers, says Michael Corbin, an attorney who specializes in bankruptcy, foreclosure and credit counseling. Closing an account diminishes your available credit, which is a criteria used by credit rating agencies when determining credit score.

"The only way out of it you either have to pay it all off or they have to file a bankruptcy," said Corbin. "It really is a perverse, backward system."

Fair Isaac Co. or FICO, based in Minneapolis, wrote in an August newsletter that their FICO score is based not on a consumer's available credit amount, but instead on a ratio of credit owed to the credit available. FICO says that method lessens the drop in a credit score if a credit line is cut or a card is canceled.

Andrea Eaton, a financial planner with Cornerstone Wealth Advisors of Edina, says that if rate increases are onerous, she would close the account even if it means a "slight decrease on my credit score."

Of course, there were those who weren't in a precarious financial position who talked about increases in their credit card rates. For them, this was more a source of confusion, even anger.

"(Twenty seven) years of credit buildup and 27 years of a 'relationship' just squashed in the mindless rush to make one more dollar before the Feds bring order to Dodge City," said David Grams of Appleton, who canceled his credit card after an increase. "Just makes me sick."

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