03/18/2010 05:12 am ET | Updated May 25, 2011

Credit Card Companies Are Sending Out Early Holiday Gifts

Just in time for the holiday shopping season, here comes a letter from Citigroup. To toss or not to toss? On the one hand, it could be just one more boring letter with changes to account terms in illegible font. On the other hand, it could be a nice little 0% balance transfer offer--handy for the season of spending ahead.

Hm. The letter is a little on the light side to contain a wad of convenient convenience checks. But on the other hand, you never know. So, here goes.

Oh no. Just one more of those endless change-of-account-terms letters, which lately have landed in cardholders' mailboxes at the same incessant rate as Victoria's Secret catalogs (VS shoppers, you know what I mean).

But this time around it's not just another boring announcement. In fact, the letter reads more like a page out of The Grinch Who Stole Christmas. In the letter, Ken Stork of Citibank's South Dakota Customer Service Center informs me that effective November 30, Citibank, will increase the variable APR for purchases on my Advantage Citicard to 29.99% APR.

Wait, what? 29.99% used to be a default interest rate, reserved only for naughty cardholders, who had fallen behind on their credit card payments or in some other way invoked the ire of card issuers. And even though I, like most other Americans, have seen my credit card limits slashed and interest rates raised, a "modest" 19.99% so far has been the highest.

I read further. The card has a variable APR, so the interest rate, now and forever more, will be calculated by adding 26.74% to the U.S. Prime Rate. In short, should the Prime Rate begin to go up, the card purchase APR will escalate with it. Citi, the letter informs me, is also increasing the transaction fee for balance transfers to 5% and the cash advance fee to 5%, with a minimum charge of $10. Hallelujah.

But clearly, Citi is trying to be nice about it. A highlighted paragraph in the middle of the page informs me that I can earn interest back. Indeed, every single month that I pay on time, Citi will give me a credit equal to a whopping 10 percent of the total interest charge on the purchase balance to "help offset the increase in the purchase APR."

Ten percent credit back! That's downright amazing! What a deal! Until, of course, you do the math: 10 percent of a 29.99% APR is 2.99%--so that great 10% credit on interest charges effectively lowers my purchase APR to 26.99%. How very generous.

The timing of this monstrous interest rate increase is baffling. It comes at a time when Congress is calling on credit card companies to stop hiking interest rates before the new Credit CARD Act steps into effect in February of 2010. Prominent members of Congress, like Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee and Rep. Carolyn B. Maloney (D-N.Y.) chairman of the Joint Economic Committee, have even proposed moving up the effective date for the new law to December 1. In the face of that, several card issuers, like Bank of America, Capital One, and Discover, have pledged not to hike credit card interest rates or fees any further before the new law takes effect.

So, what gives? In checking its list of naughty and nice, why did Citigroup decide to give cardholders a big lump of coal in their stockings? One of several reasons might apply:

  1. Naughty is the new nice. Citi no longer wants the business of freeloaders like me, who always pay on time and pay their balance off in full each month. They much prefer the ones who rake up balances, pay little more than the minimum each month, and preferably, throw in a late fee every now and then. As for 'model' cardholders like me, they'd rather see me close the account than keep me hanging around.

  • Citi is trying to stay out of the poor house. Citigroup is smarting from credit losses to the tune of more than8 billion a quarter. Now, like a gambler seeking to make up losses in any way possible, Citi is making a desperate move to generate more revenue, no matter the cost to cardholders, nor to the company's goodwill among consumers.
  • Making up for lost time. Citigroup is behind the curve. Other card issuers have been busy raising interest rates and changing fixed rate cards to variable rate cards (on which interest rates can still increase even after the new credit card laws step into effect). Bank of America, Capital One, and Discover can promise to be nice, because they're well ahead of the curve and have already increased interest rates and changed fixed rate cards to variable rate cards.
  • It just got to be too much. Even bankers have feelings. The burden of conscientiously managing45 billion in tax payer bail-out money has gotten to be just too much for Ken Stork and his Citigroup bosses. Collectively, they've had a nervous break-down. Forgive them, because they know not what they are doing.
  • All of the above.
  • All of the above, except 4.
  • My guess is that number 6 is the best answer. When not busy sticking the Little People like me with punitive 29.99% interest rates, bankers just have their hands too full paying out generous bonuses to themselves. With only 24 hours in a day, there's no time left to fret about how to handle taxpayers' TARP money in a responsible way. So, as much as I'd like to think Ken Stork and his Citi bosses are off their rocker, unfortunately, I have to admit, they know all too well what they doing.

    So, if you get a coal in your stocking from your card issuer this Christmas, what should you do? If you don't carry a balance, and never intend to, a rate hike won't affect you. If you do carry a balance and get stuck with a usury-like interest rate increase, you have little choice other than to opt out, unless you want to spend your hard-earned dollars lining the pockets of bankers. That means that your credit card account will be closed, typically within a year, and that will possibly hurt your credit score. However, you will be able to pay off the balance at the existing, hopefully moderately decent, interest rate.