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Credit Card Execs Defend Rate Policies

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DIBYA SARKAR | December 4, 2007 03:35 PM EST | AP

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WASHINGTON — Credit-card executives on Tuesday deflected congressional criticism of their practice of using falling credit scores to charge customers higher interest rates.

Industry critics say it's another example of abusive, confusing credit-card practices that can push consumers deeper into debt.

Sen. Carl Levin, D-Mich., chairman of a Senate Homeland Security and Governmental Affairs subcommittee, said customers who consistently pay on time are getting whacked by credit-card issuers that raise such rates without an adequate warning or a clear notice.

"The bottom line for me is this: when a credit card issuer promises to provide a cardholder with a specific interest rate if they meet their credit card obligations, and the cardholder holds up their end of the bargain, the credit-card issuer should have to do the same," he said Tuesday.

Levin is holding out the club of possible legislation to spur voluntary changes by the industry.

But executives from Bank of America Corp. and Discover Financial Services LLC. told the subcommittee that a credit score is one of several factors in determining whether to increase a customer's interest rate.

"It's important criteria for how to manage risk and pricing," said Roger Hochschild, Discover's president and chief operating officer.

Bruce Hammonds, president of Bank of America Card Services, said his bank also considers customer behavior on an account and their debt to others, in addition to credit scores.

But it's the behavior of credit-card issuers that prompted several consumers to testify before Levin's subcommittee about not being informed when their rates were hiked.

Janet Hard of Freeland, Mich., said her Discover credit-card rate nearly tripled without adequate notice and that issuers send "deliberately misleading and confusing" information.

With Americans weighed down by some $900 billion in credit-card debt _ an average $2,200 per household _ practices of the very profitable industry have been ripe for scrutiny by the Democratic-controlled Congress.

Levin's subcommittee, which has been investigating the industry, looked at how credit-card issuers raise consumers' rates, to as high as 30 percent, when their so-called FICO credit scores decline _ even if they've paid credit-card bills regularly and promptly. In many cases, consumers have little notice of the increased rate, which are automatically triggered by declines in FICO scores for reasons left unexplained, the subcommittee found.

In some cases, just opening another account, such as a department store credit card, could trigger the downgrade in credit score.

In one of the cases cited by the subcommittee, Marjorie Hancock of Arlington, Mass., wound up with interest rates on her four Bank of America credit cards of 8 percent, 14 percent, 19 percent and 27 percent, even though her credit risk is the same for all four.

Ken Clayton, managing director of card policy for the American Bankers Association, which represents the banking industry, said Monday: "Costs for nearly every product can change, be it because consumer's risk profiles change or because underlying costs change. Credit cards are no different."

Five big financial companies _ Discover, Bank of America., Citigroup Inc., JPMorgan Chase & Co. and Capital One Financial Corp. _ issue around 80 percent of U.S. credit cards, according to the subcommittee. A Capital One official also testified at Tuesday's hearing.

Citigroup, JPMorgan Chase and Capital One said they will discontinue the practice; Citigroup's change already is in place and JPMorgan Chase's will take effect in March. But Levin says legislation may still be needed to get other companies to do the same.

Larry DiRita, a spokesman for Bank of America, said its customers "have the right to say 'no' to an increase."

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AP Business Writer Marcy Gordon in Washington contributed to this report.