Capitol Battle over Credit Cards

While legislators like Carl Levin want to crack down on the credit-card industry's practices, company execs warn of unforeseen consequences

by Jessica Silver-Greenberg

Senator Carl Levin (D-Mich.), center Getty Images

Last February, Janet Hard got an unpleasant surprise when she opened her credit-card statement from Discover (DFS): The interest rate on her card had been hiked to 24% from 18%. Hard was perplexed since she'd been making regular payments to the card company for more than two years. The Discover representative couldn't offer much clarity. "When I pointed out that we were not late in making a payment, she agreed that our account was in very good standing," says Hard. "But they could still raise our rates."

The reason for the change was a deterioration in Hard's credit score. Discover, which monitors such scores for its customers, hiked Hard's interest rate because she was perceived to be a bigger risk, even though she'd been a dependable customer for the company. The 42-year-old nurse and mother of two, who lives with her husband in Freeland, Mich., has been struggling with the additional financial burden. She's paid a total of $2,400 to Discover since the change, but almost all of that has gone to pay interest and only $350 has been used to pay down her debt. "My husband and I feel as though we have been robbed," she says.

Round Two of Hearings

Hard was one of the central protagonists in a Dec. 4 congressional hearing spearheaded by Senator Carl Levin (D-Mich.). The hearing, the second such event by Levin, examined the credit-card industry practice of hiking interest rates for certain consumers even if they pay at least their minimum balance on time. Levin has advocated reforms for the industry, including a ban on such increases. "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," says Levin.

Credit-card companies, which have come under heavy fire in recent months, have shown a willingness to change certain practices. After Levin's first round of hearings last year, JPMorgan Chase (JPM) eliminated a practice known as "double-cycle" billing (BusinessWeek.com, 9/4/07), which often led to higher finance charges. Citigroup (C) pledged to end its practice of "universal default," in which the interest rate charged to a customer could be increased because of late payments to another creditor. And in advance of Levin's hearings, a number of companies including Citigroup and JPMorgan Chase have said they will end the practice of hiking customers' interest rates solely because of their credit scores.

Lenders Cling to Ability to Reset Rates

But many credit-card companies are holding firm against Levin and other critics on a broader point: They say they need to have flexibility in how they set interest rates and other terms. Discover, for example, says it's essential to be able to change interest rates depending on fluctuations in people's credit scores. "It's important criteria for how to manage risk and pricing," said Roger Hochschild, president and chief operating officer at Discover, during his testimony at Levin's hearings.

Credit-card company executives warned that strict legislation could have unforeseen, negative consequences for consumers. "The ability to modify the terms of a credit-card agreement to accommodate changes over time to the economy or the creditworthiness of consumers must be preserved as a matter of fiduciary responsibility," said Ryan Schneider, Capital One Financial's (COF) president, in his testimony.