The State Attorney General of West Virginia last week filed a suit against Capital One, one of the six largest U.S. credit card issuers, alleging that the company had engaged in unfair credit card practices and collection procedures.
According to the suit, Capital One for many years has artificially inflated fee income from subprime borrowers by issuing several credit cards with low limits to cardholders instead of increasing credit limits on their card. The practice not only boosts the annual and monthly fees collected from each cardholder, cardholders juggling multiple credit cards are also more likely to slip up and make late payments or exceed the limit on one or several of their credit cards.
As much as 30 percent of Capital One’s credit card loans are issued to people with bad credit. According to a report in Business Week, while other large credit card issuers, such as CitiCards, Chase, and Bank of America also serve the subprime lending market, they do not issue multiple cards to cardholders.
“In the higher-risk market, no lender is more aggressive in offering multiple cards,” says Kathryn Crumpton, manager of Consumer Credit Counseling Service of Greater Milwaukee in a statement to BusinessWeek.
The suit filed by the West Virginia State Attorney also contends that Capital One used deceptive practices to collect credit card debt from cardholders whose debt had already been written off (and which the consumers had already taken a hit to their credit score for). The card issuer allegedly sent out bait-and-switch solicitations offering consumers a new credit card, if the consumer agreed to transfer the previously charged-off balance to the new card and pay off the balance. The practice effectively reset the statute of limitations, so that the consumer again became liable for the old debt. Capital One then issued a new credit card with as little as $1 in new credit, and began to charge interest, late fees, and over-the-limit fees on the old, previously charged-off debt.
According to the suit, Capital One also “unconsciousnably” assessed over-the-limit fees on subprime, low-limit credit cards and billed fees on credit cards that were never activated. The card issuer allegedly also sold credit card payment protection plans, offering to take over minimum credit card payments should a cardholder become disabled or unemployed, to people who were ineligible for the benefit.
The suit filed by the State Attorney General asks the court to stop the deceptive practices and require Capital One and other companies named in the suit to issue a refund of all excess charges and pay a $5,000 fine for each violation.
The Capital One suit is particularly interesting in light of the new credit card rules, which become effective at the end of February this year. The new credit card law clamps down on so-called fee-harvester credit cards for people with bad credit by limiting the fees subprime card issuers can charge to 25 percent of the credit limit annually. However, there are no regulations in the new law forbidding the practice of issuing multiple low-limit credit cards. As subprime card issuers look for ways to restore lost fee revenue in the wake of the new credit card rules, fee-harvesting by issuing several low-limit credit cards could become an increasingly common practice. But that, of course, will likely depend on the outcome of the West Virginia case.