Consumers Urged to Examine Credit Card Contracts

Many card issuers can change the terms of the contract at any time for any reason

In the past year, many credit card companies have said they don't impose "universal default" rate hikes based on the way customers handle other credit accounts. Now it appears that credit card companies might be hiding universal default in a different section of the credit card contract, according to a report released last month by Consumer Action. Cardholders will find that most major issuers reserve the right to impose new terms at any time, in the "change-in-terms" section of their cardholder agreements.
Consumer Action found that nine of the top 10 issuers could change the contract rules for any reason, according to its 2007 Credit Card Survey.
"Very few card companies will admit to the much maligned practice of universal default," said Linda Sherry, director of national priorities at Consumer Action, "But it's compelling that nearly all of the top 10 issuers reserve the right to change the terms of cardholder agreements at any time for any reason."
Additional information about industry practices from the survey:

• Late payments result in higher penalty interest rates with 85% of issuers—an increase from the 2005 finding of 79%. Consumer Action found penalty interest rates as high as 32.2%—on average they're 24.5%. Cardholders who take a $100 cash advance for only one month can pay $12 in fees and interest. Annualized, that's about 144% interest.
• Nine of the 20 banks surveyed employ a method known as "residual" or "trailing" interest, calculating credit card interest up until the day full payment is received—a practice many consumer groups claim is deceptive.
• Of the 83 cards surveyed, 89% have higher APRs for cash advances. This proportion has increased 14 percentage points since 2005.
• Three-quarters of surveyed banks charge a percentage-based fee when cardholders transfer a balance. Of 58 cards with balance-transfer promotions for new cardholders, less than half (25) will waive the balance transfer fee for the offer. Among banks with balance-transfer fees, six have no caps on fees.
• Some issuers charge cardholders hefty fees to make on-time payments by phone. Thirteen out of 20 surveyed banks charged a fee for phone payments. The fees ranged from $3 at Amalgamated Bank of Chicago to $15 at HSBC, although Citi and Washington Mutual charge only a nickel less at $14.95.
• 75% of surveyed issuers had no minimum age requirement for authorized users. Typically, authorized users are relatives or friends of the primary cardholder, who remains responsible for paying the account.
• Consumer Action examined 83 cards from 20 banks, including the top 10 U.S. credit card issuers. Interest rates ranged from 7.9% to 25.24%. The average purchase rate of 14.5% is up about two percentage points since 2005, due to a rise in the prime rate from 6% to 8.25%.
• This year, the 15 fixed-rate cards average 11.34%—almost flat since the 2005 finding of 11.15%. The 69 variable-rate cards averaged 15.25%. In 2005, the average variable interest rate was 12.96%, which corresponds to the two-year, 2.25-point increase in the prime rate.