Bank of America Blindsiding Cardholders?
The Nation's Biggest Bank Is Doubling Interest Rates for Some of its Most Responsible Credit Card Customers

By: Robert Berner
Business Week
February 8, 2007

Credit card issuers have drawn fire for jacking up interest rates on cardholders who aren't behind on payments but whose credit scores have fallen for other reasons. Now, some consumers complain, Bank of America is increasing rates based on no apparent deterioration in their credit scores at all.

The major credit card lender in mid-January sent letters notifying some responsible cardholders that it would more than double their rates to as high as 28%, without giving explanations for the increases, according to copies of five letters obtained by BusinessWeek.

Fine print at the end of the letter -- headed "Important Amendment to Your Credit Card Agreement" –- advised calling an 800-number for the reason, but consumers who called say they were unable to get a clear answer.

"No one could give me an explanation," says Eric Fresch, a Huron, Ohio, engineer who is on time with his Bank of America card payments and knows of no decline in the status of his overall credit.

Bank of America spokeswoman Betty Riess confirms some bank cardholders could be receiving rate increases for reasons other than declines in credit scores, such as running higher balances with their Bank of America cards or with other creditors. She says the increases are part of a "periodic review" that assesses customers' credit risk.

Reiss declined to say if the Charlotte, N.C., bank had changed its credit standards, thereby bumping some consumers' rates, or how many cardholders were being affected by the review. Bank of America has 40 million U.S. credit card accounts.

Arbitrary and Aggressive

Buzz about the letters is building on the Internet. Since mid-January, Credit.com, a credit card information site, has received 40 complaints from consumers whom Bank of America notified of sharp rate increases, even though they were current on their bills, says Emily Davidson, a Credit.com researcher. Complaint sites My3cents and Bank of America: Bad for America say they have received similar complaints.

The so-called opt-out letters give borrowers the option of no longer using their cards and paying off their balances at the old rates. But they must write Bank of America by later this month if they plan to do so. If they don't, their rates on existing and new balances automatically will rise.

What's striking is how arbitrary the Bank of America rate increases appear, credit industry experts say.

In recent years, many card companies have turned to a practice called "risk-based pricing," in which they will raise a regular paying consumer's rate because of a decline in the person's FICO score. FICO is a credit-risk score developed by Fair Isaac that includes a number of risk metrics the Minneapolis company doesn't disclose.

Credit reporting bureaus supply creditors with FICO scores along with other data, such as late payments and debts owed.

In a December hearing spearheaded by Sen. Carl Levin, D-Mich., senators slammed big card companies for using such pricing with customers who pay on time. By law, credit card lenders can change terms as long as they notify borrowers. Even so, JPMorgan Chase and Citigroup announced ahead of Levin's hearing that they would stop the practice of raising card rates based solely on FICO scores.

But Bank of America appears to be taking an even more aggressive stance because, beyond credit scores, it is using internal criteria that aren't available to consumers. That makes the reasons for the rate increases even more opaque.

"Congress has faulted credit card companies for lack of transparency in raising rates," says William Ryan, a financial industry analyst at Portales Partners, a New York research firm. "Bank of America is bringing it to a new level."

Analysts also say they are surprised by the magnitude of the rate increases Bank of America is imposing on affected cardholders.

Michael Jordan, 25, a software developer who lives in Higganum, Conn., says he received a letter from Bank of America in late January advising him that his card rate would rise from 9.99% to 24.99%. The software developer, who earns $80,000 a year, says he was "shocked" because his payments had been on time and his credit scores hadn't changed in the past year.

In fact, Jordan says, he has only $4,500 in overall outstanding credit card debt on two cards and that, on the Bank of America card in question, he had paid down his balance to $3,000 from $3,700 in August.

"His rate increase seems unjustified based on his credit profile," says David Robertson, the publisher of The Nilson Report, a credit industry trade publication.

Bank of America: A merger, or more, too far?

When Jordan called Bank of America about the higher rate, he says, the bank representative couldn't explain why his rate was going up. On a second call, he adds, the individual told him the reason for the increase was that he hadn't been paying down his balance fast enough, though he had lowered it by 19% in the past six months and was now utilizing only 54% of his $5,500 credit limit.

Riess, the Bank of America spokeswoman, declined to discuss individual rate increases or to list all the criteria the bank was using as reasons to raise rates on existing cardholders.

Analysts say the bank's move is obviously aimed at shoring up profits. On Jan. 22, Bank of America reported a 95% decrease in fourth-quarter earnings due mostly to increases in loan-loss reserves for consumer credit, including rising card charge-offs and write-downs in mortgage-related securities.

Bank of America hasn't made it easy for consumers to reject the new rates. The letters require that consumers write Bank of America to agree to no longer use their cards and pay off existing balances at the old rates -- they can't telephone to do so, nor does Bank of America provide a form or a return envelope.

Moreover, consumers don't have much time to respond. Cardholders say they got the letters in the latter half of January: Four of the letters obtained by BusinessWeek require a written response by Feb. 19, while the fifth requires a response by Feb. 29.

A response, of course, assumes consumers read the letter from Bank of America as they sort junk mail. "It's a reasonable assumption that most don't," says Karen Gross, a legal scholar on consumer credit and the president of Southern Vermont College.

Bank of America also benefits from consumers who do agree to pay off balances at the old rates and not use their cards again, says Nathan Powell, a credit analyst research firm RiskMetrics Group.

The bank, he says, is clearly trying to protect itself from worsening credit card charge-offs ahead, something analysts widely expect in the card industry as the economy deteriorates.

Powell says the bank must have identified a list of other credit criteria besides FICO that it is using to screen cardholders and determined it's no longer worth new business if they don't accept the higher rates.

So far, Bank of America's charge-off rates have risen in line with the credit card industry, up to 5.08% of receivables at the end of the fourth quarter from 4.57% a year ago. "The bank doesn't want to get behind the curve," Powell says.

Bank of America is trying to get ahead of Amanda Pennington, 29, of Euless, Texas. She says the bank raised her credit limit three months ago from $5,000 to $8,000 because of her strong payment history. Then she got the letter from the bank in mid-January notifying that her rate would rise from 15.74% to 25.99%. When she called, she says, the bank told her it was raising her rate because her balance was now too high, though it was still under the higher new limit the bank had previously granted.

After paying tuition for a community college course, transferring another balance and paying for daily expenses, Pennington's Bank of America debt now stands at $7,500. Bank of America declined to comment on individual customers.

Adam Levin, the CEO of Credit.com and former head of New Jersey's Division of Consumer Affairs, says he is surprised Bank of America would risk bad public relations with its rate increases, given the congressional hearings in December.

The bank risks alienating new customers and existing ones by being so brazen, he says, adding, "Either Bank of America has more financial troubles than it is willing to admit or it has a level of institutional arrogance that is unacceptable."

Credit Card Companies' Evil Tricks

Some of the Worst Offenses: Huge Fees Exceed Card Issuers' Costs and Risks. Interest Rates Aren't Disclosed to Card Applicants. Rates Get Jacked up Even If You Pay Just Hours Late.

By Liz Pulliam Weston
MSN Money
February 8, 2008

Parents spend the first several years of children's lives teaching them how to play fair. By the time we hit elementary school, most of us are pretty good at knowing what's just and what's not.

That sense of fair versus foul, though, tends to get tangled up in the world of credit cards. Some practices that seem egregious at first glance actually make sense when you understand their rationale. Other policies don't hold up so well to scrutiny, even though they're widely accepted in the industry.

What makes matters more complicated is that a few credit card issuers are bad to the bone. Some of the companies that have the most consumer-friendly practices in one area turn around and punish their customers unfairly in another.

After many years of covering this industry, fielding reader complaints, talking to the issuers and listening to consumer advocates, I've drawn up the following list of what I consider fair and foul play, plus what you can do about it.

Mystery Interest Rates

Fair play: charging different customers different interest rates or offering different terms, based on their credit histories.

Foul play: not telling folks upfront what interest rates or terms they'll get.

If you have a good credit history, you should get a good rate, not one that's been inflated to cover the risks of others who haven't been as responsible.

But no one should have to play Russian roulette when applying for a card. Though some issuers, including Citibank and Capital One, usually tell you in advance what rate you'll get if approved, others -- including Chase, Discover, American Express, HSBC and Bank of America -- typically only offer a range of possible rates. You might get a rate that's in the single digits or one that's over 20%.

"In the best of all worlds, you would fill out an application, be told what interest rate you are approved for, then be given the chance to OK that rate or decline the offer. It rarely works that way," said Justin McHenry, the research director for

IndexCreditCards.com. "Oftentimes you won't even know what rate you've been approved for until the card shows up in the mail."

Many times the terms are variable as well. A card may offer 0% for "up to" a year, for example, but once you've applied, you may get the touted rate for as little as three months, said Jeffrey Weber of SmartCreditChoices.com.

Credit limits are almost never disclosed in advance, either. This can be a serious issue for people transferring balances because shifting debt from a high-limit card to a lower-limit card can damage their credit scores.

Your best move: Don't hang on to a card you don't want. Though closing cards can never help your FICO credit scores and may hurt them, the damage isn't likely to be as serious with a newly issued card as it might be with one you've held for many years.

But you shouldn't apply willy-nilly for cards, either, because each application can potentially ding your scores. Also, some lenders may look askance at a borrower who rapidly opens and closes accounts, McHenry said, thinking such customers will be unprofitable.

If you're looking for a lower rate, first contact your existing issuer and negotiate for one. Read "Get a better deal . . . with a threat" for tips. If you plan to apply for a new card, know your FICO scores so you have an idea of what interest rates you're likely to get. You can get a ballpark idea of your scores from MSN Money's credit score estimator; generally, folks with FICOs above 720 get the best credit card rates and terms.

Slanted Reports

Fair play: reporting your missteps to credit bureaus.

Foul play: reporting half-truths.

The credit reporting system in the United States has some serious flaws. Creditors wield too much power, and it's too hard for consumers to fix mistakes.

But overall, the system has succeeded in making credit more widely available, which is a boon to savvy consumers. If you get credit and use it responsibly, you can build a credit history that allows you to get the loans you need to buy a home, build a business or accomplish other goals.

What irks me, though, are lenders that deliberately make their customers look like worse credit risks than they are. Some of the worst offenders are issuers that don't report their customers' on-time payment records at all. Next on the list are those that don't report their customers' credit limits, like Capital One.

When a lender doesn't report a customer's credit limit, the bureaus typically use the "highest balance charged" as a proxy for the limit. The problem comes when borrowers charge about the same amount each month.

Here's how it works: If you use $300 of a $1,000 limit that's properly reported, the all-important credit-scoring formulas figure your "credit utilization" at 30%, and that's good. If your limit isn't reported and the highest balance you ever had was $300, it looks like you're using 100% of your available credit -- and that's bad.

It makes sense not to report a credit limit when a card has no preset spending limit, as is the case with many American Express cards. But folks that have those types of cards tend to have pretty good credit to begin with, so the lack of an accurate credit limit on one account isn't likely to hurt much. The people who really get crunched are the people with short or troubled credit histories who are trying to do things right but are unknowingly being penalized by their credit issuers' practices.

Your best moves: If your issuer isn't properly listing your credit limits, you can request that they do so. If your issuer is Capital One, though, you're out of luck. You can either charge up a big balance to reset your "highest balance charged" or switch to another card issuer.

Soaring Rates

Fair play: raising your interest rate if you miss a payment.

Foul play: jacking up your rate if you're a few days late.

Late payments can happen to virtually anyone. Payments get delayed in the mail; online bill-payment systems experience glitches; issuers change addresses and payments go awry. Or people just goof.

Goofing to the point of forgetting a payment altogether, though, is rarer. A skipped payment is thus a better indication that someone is having money trouble.

The credit card companies know there's a big difference between late and skipped payments. That's among the reasons payments that are less than 30 days overdue typically aren't reported to the credit bureaus. But many issuers will still take advantage of your mistake by sending your rate skyward, even if your payment arrived only hours (not even days) late.

Your best moves: Don't carry credit card balances. Card issuers have far fewer ways to mess with you when you pay your balance in full every month.

Otherwise, reduce the likelihood of late payments by setting up recurring payments in your online bill-payment system or by agreeing to an automatic debit so at least the minimum payment is withdrawn from your checking account each month. If you use any method other than automatic debit, you'll need to check the credit card issuer's mailing address each month to make sure it hasn't changed.

If you do get dinged with a late fee, or a fee plus a higher rate, talk to your credit card company. Many issuers will waive late fees for good customers. Fewer will rescind the interest rate hike, but you can always try. Some will restore your original rate after 6 months of on-time payments.

Big Fees

Fair play: charging late, over-limit and balance transfer fees.

Foul play: charging outrageous late, over-limit and balance transfer fees.

Until the mid-1990s, the typical penalty fee was about $10. Last year, the average late fee was $35, according to IndexCreditCards.com, and many companies charged $39. The average over-limit fee was a hair more than $32.

Some issuers also removed limits on the balance transfer fees they charge. In the past, the typical balance-transfer fee was 3% with a cap of around $75. Today some cards issued by Chase, Bank of America and others have no cap, which means a $5,000 transfer could cost you $150.

It makes sense to charge borrowers something for handling a balance transfer, just as it's justifiable to subject them to some kind of penalty for paying late or going over the limit. It's the amount that's being charged that makes no sense. These fees bear little relation to the costs or risks involved.

Your best moves: Clearly, you want to avoid late and over-limit fees whenever possible. Set up automatic payments so at least your minimum balance gets paid every month. Track your balances -- which you can do online, via phone, by using personal-finance software like Microsoft Money or Quicken, or simply by writing down your purchases and keeping a running tally. (Microsoft is the publisher of MSN Money.) You'll do your credit scores a favor by keeping balances to no more than 30% of your limits.

If you do get dinged, ask your issuer to waive the fee.

Before you transfer a balance, read the fine print and calculate all of the fees you're likely to face. Compare offers using sites such as CardRatings.com, Bankrate.com or IndexCards.com. With a little research, you can often get a better deal. Then use your low rate to help you pay off your balance; don't keep shifting it around.

A Whole Deck of Cards

Fair play: issuing cards with low credit limits to riskier borrowers.

Foul play: issuing multiple cards with low limits to risky borrowers.

Credit card companies wisely limit their risks with certain customers by issuing cards with low limits, say $200 to $500. You're most likely to get one of these cards if your credit history is short or troubled.

As you show you can responsibly use the credit -- by paying your bills on time and not maxing out your card -- a typical issuer will reward you by raising your limit. If you miss payments or go over your limit, though, you don't typically get more credit.

An exception is Capital One. BusinessWeek recently revealed the card company's practice of simply issuing additional low-limit cards to the same customers. The big downside for borrowers is that they have more due dates and limits to track. The practice increases the chances a cardholder will mess up and incur late or over-limit fees.

Capital One has helped a lot of folks rebuild their credit after bankruptcy and other financial missteps. But it needs to drop the practice of issuing multiple low-limit cards.

Your best move: Don't max out your credit cards or charge more than you can pay off in full every month. Instead of accepting a new card, ask for a higher credit limit on the one you have.

Paying Twice

Fair play: charging interest on balance transfers.

Foul play: charging interest before the check clears.

This one may be a little tricky to understand, so bear with me.

When you're approved to transfer a credit card balance, the company that's receiving your balance sends a payment to the company that currently has your debt. This payment may be electronic or may be a check.

The issue revolves around when your new credit card company begins charging interest on the balance transfer. Some start doing so long before the balance is actually switched, which means you could wind up paying interest to two companies on the same debt for a week or even longer.

Curtis Arnold of CardRatings.com polled six major issuers -- American Express, Bank of America, Capital One, Chase, Citibank and Wells Fargo -- and found that all begin charging interest as soon as they initiate an electronic transfer to the card issuer holding your balance. That's OK in my book because electronic transfers tend to happen quickly, and the overlap period where you're paying interest twice is usually a day or two, at most.

If the issuer sends a check, though, policies vary. Bank of America, Citibank and Wells Fargo wait for the check to clear before starting to charge interest, Arnold said. American Express, Capital One and Chase begin to levy finance charges as soon as they cut the check. If it takes a while for the receiving bank to get and deposit the payment, you're the one who pays.

Your best moves: Is this a huge deal for a consumer? Probably not. Even with big transfers -- say, $10,000 or more -- we're still talking about only a few bucks a day and a total cost that's less than most late fees. But it's annoying nonetheless. Clearly, you want to try to press for an electronic transfer whenever possible.

The Dirty Secret of Campus Credit Cards

Issued under Affinity Contracts, They Represent Sweetheart Deals Between Card Companies and the Colleges. It's the Students Who Pay the Price

By Jessica Silver-Greenberg
BusinessWeek
September 6, 2007

It was three years ago and Irene Leech still remembers the shock clearly. An associate professor at Virginia Tech who specializes in consumer affairs, she read the terms of the credit card that her school, together with JPMorgan Chase, was marketing to students, alumni, and staff. Behind the card's shiny surface, featuring the football stadium at sunset, the so-called "affinity" card offered some of the most unfavorable terms around for card users. Among other things, the card had what's known as "double-cycle" billing, where interest is calculated over two months instead of the typical one, resulting in higher finance charges. "I was shocked," she says.

The experience convinced Leech that it was time for her to take a stand. First in a limited way and now more broadly, she has been speaking out against the conflicts of interest that universities face when they strike business agreements with credit card companies. Chase ultimately dropped double-cycle billing on the Virginia Tech card, as it did for all cards earlier this year. But Leech warns that schools that get money from credit card companies through affinity contracts or other marketing agreements face intractable problems, in which the school's financial interests are in direct conflict with those of students and alumni.

"Students assume that if the university has an affinity contract with a bank to offer a credit card, the university will surely look after them," she says. "But these contracts are really money-makers for the school, and not about services to the students."

Million Dollar Relationships

As a growing number of college kids pile up mountains of credit-card debt, the entire issue of credit-card companies on campus is coming under increasing scrutiny. Earlier this year, the state legislatures in Texas, Oklahoma, and New York voted to clamp down on credit-card marketing to college students (BusinessWeek.com, 9/4/07).

"Clear Conflict of Interest"

Congress plans to hold hearings on the companies' practices later this year. With such efforts underway, activists say that it is inevitable that the relationships between credit card companies and universities will ultimately face greater examination (BusinessWeek.com 9/3/07).

Affinity relationships typically mean that schools enter into partnership with a credit card company to issue a co-branded card. Bank of America (

Surrounded by Secrecy

Benefits Scholarship Funds?

Funding Financial Literacy

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