In January of this year the credit card division of Bank of America sent a letter to some of its 40 million credit card customers telling them by fiat that they were jacking up the interest rates on their BoA credit cards to as high as 28%. There was no explanation given about why this was happening. In many cases the cardholders were responsible citizens who paid their bills on time and were not experiencing any life changing financial difficulties that would have suddenly made them a high credit risk. So what gives?
Consumers who called the BoA 800 number at the bottom of the letter were shuffled around with no real explanation forthcoming. The letter created a buzz and the story was picked up in the media. When prompted by telephone calls from journalists Bank of America spokespersons confirmed that some bank cardholders received rate increases for reasons other than declines in credit scores, such as running higher balances with their BoA cards or even with other creditors. One spokesperson said that the increases were part of a normal review of customers’ credit risk.
One consumer was taken aback by Bank of America’s institutional arrogance and apparent disregard of the negative public relations impact of its decision. The explanation is more practical. Bank of America is trying to stay ahead of the curve of credit card charge-offs, which have increased year-to-year industry wide from about 4.6% to 5.1%. When it comes to the bottom line the accounting department will trump the PR folks every time.
Bank of America is not going to be a party of one when it comes to arbitrarily skyrocketing your credit card rate or changing the rules of the game before you come to bat in the 4th inning. The 10 biggest credit card companies control 90% of the credit card business in the USA. Ordinary consumers are often the casualties of the fierce competition between these behemoths for high-end market share and profits.
Bank of America finally acknowledged high balances as the justification for increasing credit card interest rates. The thinking is that people who use most or the credit line available to them are a higher default risk than people who use only ten or twenty percent. Some credit experts believe that credit scores are partially based on categories of 20-40-60-80-100 percent credit utilization. Between two people with otherwise identical credit reports, the one who has used 80-100 percent of their available credit may score as many as 100 FICO points lower than the person under 20 percent utilization.
If the playing field were level, consumers could somewhat protect themselves against astronomically high interest rates and credit score hits by monitoring their credit utilization levels. Unfortunately, the last thing the credit card companies want, or will allow, is a level playing field. A 2003 study by the Federal Reserve Board revealed that the big credit card companies do not always report credit limits to the credit reporting bureaus. The reason for withholding this information is to make their own customers look less attractive to the competition.
Here is an example. Say that you had a $10,000 credit limit on your Capital One card and the highest balance you ever charged on that card was $2,000. You would think you were a good credit card citizen. And you would be. Capital One’s competitors would share your opinion and flood your mail box with enticing offers. How does Capital One avoid the possibility of losing a good customer? By not reporting your $10,000 credit limit.
With no other information available to them the credit reporting bureaus will use your highest credit balance of $2,000 as your credit limit. A current $1,500 balance makes it look like you are maxing out your Capital One credit card. A much different picture than the real situation which makes you much less attractive as a new credit card prospect to Capital One’s competitors. Think it can’t happen to you? If you have a Capital One credit card look at your credit report and check the credit limit on that account. What will Capital One do about it? Probably nothing.