Fed's Rate Cuts Bring No Relief For Consumers' Credit Card Bills

Rep. Carolyn Maloney (D-N.Y.) last week introduced a bill to restrict fees and rate changes that credit card companies could impose. (By Carol T. Powers -- Bloomberg News)

On Thursday, Rep. Carolyn B. Maloney (D-N.Y.), chairman of the House financial institutions and consumer credit subcommittee, introduced the Credit Cardholders' Bill of Rights Act of 2008, which would, among other things, restrict fees and rate changes that companies could impose.

Sen. Carl M. Levin (D-Mich.), chairman of the Permanent Subcommittee on Investigations, has proposed a similar bill. He said in an interview that Congress will keep an eye on how card issuers react to the changes in the federal funds rate, which the Fed controls. "The credit cards raise the rates when they go up. They should go down when interest rates go down," he said.

Some card issuers have already responded to congressional pressure. Citigroup, for instance, said last year that it would end a practice known as universal default in which it penalized customers for making late payments to other creditors. In March, Chase will no longer increase rates when credit scores drop.

Most major banks base the annual percentage rates on variable rate cards, which make up the majority of credit cards, on the prime rate, which is pegged to the federal funds rate. But most banks have latitude when it comes to how much and how soon they drop rates after a Federal Reserve action -- and for whom.

"You can't look at that rate that the Fed publishes and say that's what I'm getting," said Desiree Fish, a spokeswoman for American Express.

Betty Reiss, a spokeswoman for Bank of America, said it has been common practice for some time for the bank to periodically review each account and "reprice an individual based on that risk assessment."

Customers can reject new rates and close their accounts, she said. She would not disclose how many people have been repriced recently but said that last year, fewer than 3 percent of customers received such rate increases, while 26 percent ended the year with lower rates.

Chase, meanwhile, increased its rate for new Freedom card customers "due to a variety of reasons, from providing a richer rewards program to more effectively managing risk," said spokesman Paul Hartwick.

Joanne Robertson-Gordon, a Takoma Park resident, has a different kind of Chase Visa credit card but in November, she said, she received a letter saying her 8.9 percent rate would rise to 21.24 percent. In December, she noticed that her HSBC Mastercard had gone from 13.99 percent to 15.99 percent. She owes both creditors about $3,100 combined. "It was just painful," she said.

Since her husband died in December 2005, she has been struggling financially. She said she used to pay more than the monthly minimum. Now, she said, she typically pays only the minimum but does so on time, except for one month when she had trouble paying online. "I'm so afraid of them," she said. "Every time you call, they raise something."

Chase would not comment on Robertson-Gordon's case.

Cindy D. Savio, a spokeswoman for HSBC-North America, said privacy laws forbid her from discussing a specific customer. "What I can tell you is that most HSBC credit card accounts tied to prime will receive a decrease," she added.

Even those cardholders who get some relief will not get much, industry experts said. Since September, the Federal Reserve has cut the federal funds rate by 2.25 points, to 3 percent, while the average variable rate on credit cards has dropped less than a point, from 13.97 percent to 13.05 percent, according to BankRate.com.

"Even if your credit card company would subtract 1.25 percent off your monthly interest rate, if you're revolving a balance on a high-interest credit card, it's akin to putting a Band-Aid to a sucking chest wound," said Joe Ridout, a spokesman for Consumer Action.