Credit Card Issuers Work to Explain APR Changes

The Senate hearing last week on the increases on annual percentage rates of credit cards offered some new news to industry observers, though the two sides in the battle – card issuers and consumer advocates – mostly played their roles and said their lines as expected. Meanwhile, Sen. Barrack Obama took the opportunity to introduce a bill he is co-sponsoring that would create a rating system for credit cards.

The Senate’s Permanent Subcommittee on Investigations took testimony from three consumers whose credit card interest rates were increased, they said, either for no apparent reason or due to problems paying bills other than the credit card. The committee heard responses from leaders of three major card issuers explaining how and why APRs are increased.

Bruce L. Hammonds, president of Bank of America Card Services, said that repricing of APRs can occur as the cardholder’s payment behavior or FICO score changes.

Hammonds divulged some industry terminology during his testimony, using the phrase “off-us” repricing to refer to a change in the cardholder’s APR due to the cardholders behavior with creditors other than BofA. This approach has generally been referred to as universal default and has drawn the ire of consumer advocates and Chairman of the Investigations Subcommittee Sen. Carl Levin, a Democrat from Michigan.

Hammonds explained that “on us” repricing refers to an issuer that reprices an APR due to the cardholder’s behavior with that issuer’s card.

Hammonds defended off-us repricing in his testimony noting that “In our experience … a customer bouncing a check with us one time­­ – grounds for a default re-pricing with other banks – poses less risk than one who has fallen past due on a series of similar obligations with others.”

Roger C. Hochschild, president and chief operating officer of Discover Financial Services, defended a similar approach, calling it “Risk-Based APR Changes.” Hochschild said that Discover is testing ways to improve a cardholder’s APR if her payment behavior with another creditor improves.

Both Hochschild and Ryan Schneider, president of the card division of Capital One, said they expect an enactment of proposed changes to Regulation Z by the Federal Reserve. The proposal calls for a 45-day delay, from the current 15-day delay, in imposing an APR increase after a customer default.

Obama’s proposal would create a five-star “safety rating” system for credit cards that would review cards for consumer friendliness, such as clear language in agreements, how terms of the card are changed, and other criteria. Obama introduced the bill last week with Sen. Ron Wyden of Oregon.