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Credit cardholders across the country got a nasty surprise last week, as Citigroup informed thousands of cardholders that the interest rate on their credit cards would be raised to 29.99%.
The rate hike puts cardholders’ interest at levels that in the past were considered default interest rates, previously reserved for cardholders that had several late payments in a row or were more than 30 days behind on their credit card payments. Cardholders across the board were hit with the interest rate hike, whether they carried a balance on their card or not, and whether or not they always pay on time.
Just as bad, the interest rate increase was on variable rate credit cards linked to the prime rate, with an added margin of 26.74%. With the prime rate at historically low levels, this means that cardholders not opting out of the interest rate increase could see the APR on their credit cards skyrocket above 30%, once the prime rate begins to go up.
The interest hike comes even as members of Congress, most notably chairman of the House Financial Services Committee Rep. Barney Frank (D-Mass.) and Rep. Carolyn B. Maloney (D-N.Y.) chairman of the Joint Economic Committee, are attempting to move up the effective date for the new credit card law from February 2010 to December 1. As Rep. Frank’s strongly urged card issuers to respect the spirit of the law even before its February 22 effective date, several credit card issuers, including Bank of America, Capital One, and Discover, stepped forward and pledged not to raise interest rates any further.
The steep interest rate hike on credit cards is just one of several moves Citigroup has made over the last two weeks in a desperate attempt to shore up a sagging bottom line. With just a few days notice, the bank in mid-October closed the credit cards of thousands of holders of Shell, Citgo, ExxonMobil, and Phillips 66-Conoco gas credit cards. While Citi sent out letters with notice of the account closing, they were sent with such short notice that many cardholders had no idea that their card was no longer active, until it got refused at the pump.
The moves are just one more indication of an increasingly troubled bank reaching for every last straw to pull itself out of a seemingly bottomless abyss of losses. Spiraling credit losses brought Citi’s net income for the third quarter down to $101 million. This number, according to the New York Times, is before accounting for $288 million in preferred dividends and paying 34 percent of earnings to Washington under the terms of its debt exchange agreement. Citigroup also faced some of the highest credit card defaults in the third quarter, with write-offs of 10.15% of credit card loans, second only to Bank of America at 14.25%.
Meanwhile, cardholders affected by the interest increase who carry a balance on their account face a difficult choice. The bank offers cardholders the option to opt out of the interest rate increase and pay down the balance at the existing rate. However, that would mean closing the credit card, which could hurt credit scores. Further, for financially strapped consumers relying on credit cards to make ends meet until the economy improves, closing down a credit card account might not be a viable option.
Still, it remains to be seen if card issuers, ultimately, are shooting themselves in the foot. It could be only a matter of time before cardholders, overwhelmed by credit card debt raking up interest charges of 29.99% APR, figure out that unsecured credit card debt is just that: unsecured. As rising default rates are already indicating, more and more cardholders are opting to take the hit to their credit rating rather than being weighed down by credit card debt at usury-like interest rates.
Card issuers might do well to bear in mind that, ultimately, the repayment of unsecured debt amounts to little more than making good on a promise. Increasingly, angry and frustrated cardholders, feeling betrayed by credit card companies’ onslaught of interest rate hikes, might just decide that if card issuers don’t keep up their end of the bargain, why should they.
