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Published: December 2008

Old debt gets new rates: Citigroup raises credit card rates

An article by Tim Westrich of the Center for American Progress discusses Citigroup's announcement that it would raise its credit card interest rates on 20 percent of its customers, just weeks after accepting $25 billion from the federal government.

Click here to read the entire article at the Center for American Progress

Below is an excerpt from the article:

If Citigroup—the largest issuer of credit cards in the country—holds to standard bank practice, this increase applies not only to future charges that customers will make, but also to existing balances.

Citigroup is no doubt hurting and needs to take strong measures. It is also laying off 10,000 workers in the United States, and just announced today it will cut 50,000 jobs globally in the coming quarters. But the practice of banks raising credit card rates on previously incurred debt is a longstanding problem for which there is little defense. Families hard-pressed by the bad economic times will suddenly owe more than they thought they did on existing card balances to support a bank already being helped by taxpayers.

Nor is Citigroup alone. Another credit card giant, Bank of America, in February said that it would raise rates on cardholders—sometimes to more than double the original rate—and even to customers in good standing. Bank of America is also a recipient of $25 billion in financial rescue funds. These decisions will probably pave the way for other banks to raise their credit card rates, too.

These interest rate hikes will only shove consumers deeper into debt. This rate increase in all probability will apply to consumers’ existing credit card debt—to purchases they’ve already made. This was the case with Bank of America. Consumers who made a purchase with the expectation that they would pay one rate would presumably now have to pay a higher rate on their balance.

Consumers are already struggling with the near-record amount of debt on their plates. Credit card defaults rose to 5.5 percent in the second quarter of 2008, an increase of 77.4 percent from the first quarter of 2006. Raising interest rates will increase the debt load, making a bad situation worse. It certainly won’t help the U.S. economy recover more quickly.

It’s unfortunate that our nation’s shoddy credit card oversight rules and regulations allow for rate increases on purchases that have already been made. If credit card issuers are worried about the creditworthiness of borrowers, a more prudent response would be for the banks to cut credit limits, offer smaller limits for new cards, or make fewer offers for new accounts. Raising interest rates on old debt, even on customers in good standing, is unfair and unrelated to risk assessment.

For More Information

Center for American Progress

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Banking   ♦   Consumer Protection   ♦   Credit Cards   ♦