The Associated Press

Credit rates can trap cash-strapped buyers

Growing interest drowns struggling borrowers

MICHAEL LIEDTKE, THE ASSOCIATED PRESS

SAN FRANCISCO -- While millions of borrowers are basking in low interest rates, refinancing their mortgages and buying new cars, other consumers are watching their credit card rates climb further into the stratosphere -- to 30 percent and beyond.

Providian Financial Corp. recently raised the rate on its high-risk accounts from 23.9 percent to 29.9 percent, a move that threatens to drain thousands of dollars from financially strapped households during the next few years.

The strategy is part of the credit card industry's attempt to boost profits in a sagging economy. Lenders believe they can offset some losses by collecting more from borrowers who have been flagged as the most likely to miss payments.

Two-sided coin

The new rate at Providian, which is nursing an ailing loan portfolio, affects about $5 billion in outstanding loans nationwide. The San Francisco-based company said the 29.9 percent rate will apply to 3.3 million of the 18.5 million account holders on its books as of Sept. 30.

"There are two ways of looking at this practice," said Robert McKinley, president of CardWeb.com, a Frederick, Md., research firm that tracks industry trends. "Lenders are either getting compensated for the risks they are taking or they are beating up on disadvantaged consumers in an effort to make more money."

Some of the consumers grappling with higher credit card rates are college students who got carried away with their first credit cards. Some are immigrants who haven't established credit records to qualify for the best rates. Others are trying to re-establish good credit after a past bankruptcy, or people who couldn't pay bills on time after losing their jobs in the recession.

Providian's higher rates have infuriated many customers, but the lender believes the risks posed by the affected customers justifies the move, said Konrad Alt, Providian's chief public policy officer.

"If people don't like it, they can try to find a better deal someplace else," Alt said. "People always have the option of paying off their balance and closing their accounts."

Sweeping trend

Providian isn't the only lender imposing hefty finance charges at a time when many short-term interest rates are falling to their lowest levels in decades.

Atlanta-based CompuCredit Corp. charges 35 percent for an Aspire credit card issued to its high-risk customers. The 35 percent rate applies to about 12 percent of CompuCredit's loan portfolio, which stood at $1.8 billion as of Sept. 30, said Nancy King, director of investor relations.

Despite such increases, the average credit card interest rate nationwide stood at 14.41 percent in November, down from 16.57 percent at the start of 2001, according to CardWeb. That drop reflects the overall decline in interest rates, and credit card companies' efforts to increase business from their best customers.

Relentless bills

Hilda Madera of New York says the 23.9 percent rate on her American Express Blue card makes reducing her $2,000 balance almost impossible. "I try to pay a little more than the minimum every month, but it just doesn't seem to budge. I can't seem to make a dent in it," she said.

A single mother who supports herself and two children on her $58,000 salary as a computer specialist, Madera believes credit card lenders have been taking advantage of her for years. She carries about $23,000 in debt on six different cards.

"You never really notice the rates until you start having trouble paying them off and then, it's like, 'Oh my gosh, I can't believe this,' " she said.

Checking delinquency

Many other lenders raise their rates above 20 percent when customers become delinquent. In some cases, lenders even impose higher rates on customers in good standing when they learn of a missed payment to another bank.

American Express imposes its 23.9 percent rate on customers who have missed payments or violated their credit card contract, spokeswoman Judy Tenzer said.

American Express considers lowering the 23.9 percent rate after 12 consecutive months of good credit behavior, Tenzer said.

"The lenders know they are going after a captive audience with these higher rates," said Howard Dvorkin, president of Consolidated Credit Counseling Services in Fort Lauderdale, Fla. "That's putting a lot of these people behind the eight ball."

For more business stories go to the Business section.

NextBank closed

WASHINGTON -- Federal regulators have shut down NextBank, whose core business was issuing credit cards over the Internet. It was the first Internet bank shuttered by the government.

Government officials said the bank attracted customers with poor credit and anticipated and made a lot of delinquent loans.

The Olympian Copyright 2002

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